Homeowners and businesses across the country have suffered weather-related disasters in recent months. From hurricanes, tornadoes and other violent storms to the wildfires that are once again raging in the West, natural disasters have caused significant losses for a wide range of taxpayers. If you are among them, you may qualify for a federal income tax deduction, as well as other reliefs from the IRS.
Eligibility for claims deduction
Personal injury can result from damage, destruction or loss of property due to any sudden, unexpected or unusual event. Examples include floods, hurricanes, tornadoes, fires, earthquakes, and volcanic eruptions. Normal wear and tear or progressive deterioration of goods does not constitute a deductible loss. For example, drought is generally not eligible.
The availability of the tax deduction for damage losses varies depending on whether the losses are for personal or business use items. Generally, you can deduct losses related to your home, household items and personal vehicles if they are caused by a federally declared disaster, that is, a disaster in an area that the US President declares eligible for federal aid. Losses related to businesses or income-producing assets (for example, rental properties) can be deducted whether or not they occur in a federally declared disaster area.
Bodily injury is deductible in the year of the loss, generally the year of the accident. If your loss arises from a federally declared disaster, you can choose to treat it as occurring in the previous year. You may receive your refund sooner if you change the return for the previous year than if you wait to file your return for the accident year.
The role of reimbursements
If your loss is covered by insurance, you must reduce the loss by the amount of any refund or reimbursement expected (you must also reduce the loss of any salvage value). The refund could also result in capital gains tax liability.
When the amount you receive from insurance or other reimbursements (less any expenses you incurred to obtain the reimbursement, such as the cost of an appraisal) exceeds the cost or adjusted basis of the property, you have a capital gain. You will need to include this gain as income, unless you are eligible to defer reporting the gain.
You may be able to defer the reporting obligation if you purchase a good whose service or use is similar to the destroyed good during the specified replacement period. You can also defer if you buy a controlling stake (at least 80%) in a company that owns a similar asset or if you spend the repayment to restore the asset.
Alternatively, you can offset loss losses with loss losses not attributable to a federally declared disaster. This is the only way to deduct personal-use property losses incurred in undeclared disaster areas.
The amount of the loss compared to the deduction
For personal-use property, business-use property, or income-producing property that is not completely destroyed, your personal injury is the lesser of:
- The adjusted basis of the property immediately before the loss (typically your initial cost, plus improvements and less depreciation); Where
- The decrease in the fair market value (FMV) of the asset due to the loss (that is, the difference between the FMV immediately before and immediately after the loss).
For commercial or income producing property that is completely destroyed, the amount of the loss is the adjusted basis less any salvage value and refunds.
If a single victim involves more than one asset, you must calculate the loss on each separately. You then combine these losses to determine the number of casualties.
An exception applies to real property for personal use, such as a house. The entire property (including improvements such as landscaping) is treated as one unit. The loss is the smallest between the decrease in the FMV of the whole building and the adjusted basis of the whole building.
Other limits may also apply to the amount of loss you can claim. For personal-use property, you must reduce each loss by $ 100 (after subtracting any salvage and refund value).
But that’s not all. For personal-use goods, you must also reduce your total losses by 10% of your adjusted gross income, after applying the $ 100 rule. Therefore, smaller personal use damages losses often provide little or no tax benefit.
Documentation is essential for claiming a claim deduction. You will need to be able to show:
- Whether you owned the property or, if you rented it, were contractually liable to the owner for the damage;
- The type of incident and when it occurred;
- That the loss was the direct result of the victim; and
- Is there a claim for reimbursement with a reasonable expectation of recovery.
You must also be able to establish your adjusted base, your reimbursements and, for personal-use goods, the FMV before and after a loss.
The IRS has provided tax breaks this year to victims of numerous natural disasters, including “affected taxpayers” in Alabama, California, Kentucky, Louisiana, Michigan, Mississippi, New Jersey, New York, in Oklahoma, Pennsylvania, Tennessee and Texas. The relief generally extends the filing and other deadlines. (For detailed information for your state visit: https://bit.ly/3nzF2ui.)
A team effort
If you’ve suffered losses this year, tax relief might alleviate some of the financial pain. We can help you maximize your tax benefits and ensure compliance with any extensions.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.