There’s no question that this hurricane season has seen some of the most destructive storms to ever hit U.S. shores. Together, Harvey, Jose, Nate and Irma have taken hundreds of lives wiped out thousands of homes and businesses and left many cities completely uninhabitable. The destruction has been devastating to millions of people in Texas, Florida and every other location in these storms’ paths.
You Might Qualify for Tax Breaks
It will take many months, and in some cases, probably several years to entirely recover from the damage. While the loss of life can never be replaced, thankfully, many material possessions can be. That’s because there is some potentially good news for those who have suffered catastrophic damage from these powerful storms. While not everyone in the country who is the victim of disaster-related property damage qualifies for a tax deduction, many people who suffer the worst destruction do qualify for federal tax breaks.
What You Need to Know
In theory, if you have suffered a personal casualty loss then you qualify for an itemized deduction on your federal return. However, the reality is not everyone that suffers a loss will actually qualify. Here’s how a loss occurs. When you lose personal property, or it’s fair market value is lost, because of a catastrophe such as an earthquake, windstorm, hurricane, flood, theft, or some other disaster it counts as a casualty loss. Unfortunately, not all of these losses will qualify for a deduction because there are some requirements that your loss must meet:
- You must reduce your loss by $100 – This doesn’t sound like a big a deal and it really isn’t. However, you must also;
- Further reduce the loss by an amount equal to 10% of your adjusted gross income (AGI) for the year.
This is a much bigger deal. Here’s why. Your AGI includes all your taxable income items, as well as your chosen deductions, including, for example, alimony paid, moving expenses and IRA contributions. That can reduce your personal casualty loss deduction significantly.
Here’s How it Works
Here’s an example of what that might look like. If you have an AGI of $200,000 and you incur a personal casualty loss of $55,000 your total write off would only be $34,900 ($55,000 – $100 – $20,000 or 10% of your AGI). That’s still a significant deduction, but you would not be able to count the other $20,100. You would simply have to take that casualty loss as a personal property loss.
Special Rule for Federally Declared Disaster Area
There is one other important rule to keep in mind and this is great news for those in many parts of Houston and Florida. If your loss occurred from a disaster located in a federally declared disaster area, there is a special rule that allows you to claim your rightful deduction. Plus, you can claim it on either your return for 2017 (the year the casualty event occurred in the case of Harvey and Irma) or on an original or amended return from the previous year.
Get the Most Out of Your Deduction
Essentially, this rule allows you the opportunity to claim your deduction in the year it would benefit you the most. You don’t even have to wait to file your 2017 return if you want to file an amended 2016 return instead. Again, this rule only applies for those who live in federally declared disaster areas.
Business Casualty Loss
If you own a business and suffered a business casualty loss it’s even easier for you to claim your deduction. You don’t have to bother with the $100 rule or the 10 percent of your AGI rule, either. All you need to do is deduct the entire amount of any uninsured loss your business suffers as a business expense. You can also claim your deduction in 2017 or on an amended 2016 return. If you’re not sure how your situation will play out you can visit the IRS website and learn more from IRS Publication 547 (Casualties, Disasters, and Thefts).
A Small Victory
Of course, this is probably little consolation at the moment for those who are still trying to recover from the damage from the 2017 hurricanes, but this information will come as great news for these taxpayers at some point in the future.