Recovery efforts after natural disasters can be costly. The good news is that there is relief for taxpayers — but only if you meet certain conditions.
Let’s take a look:
Tax relief for homeowners
Personal casualty losses are deductible on your tax return as long as the property is located in a presidentially declared disaster area, and as long as:
- The loss was caused by a sudden, unexplained or unusual event. Natural disasters such as flooding, hurricanes, tornadoes, and wildfires qualify.
- The damages were not covered by insurance. You can only claim a deduction for casualty losses not covered or reimbursed by your insurance. The catch here is that if you submit a claim to your insurance company late in the year, your claim could still be pending come tax time. If that happens, you can file an extension on your taxes. Your tax professional can advise you on what losses you can deduct and help you file for an extension.
- Your losses were sufficient to overcome any reductions required by the IRS. That agency requires several “reductions” to claim casualty losses on your tax forms. The first is that you must subtract $100 from the total loss amount for each casualty event. This is referred to as the $100 loss limit.
Second, you must reduce the amount by 10% of your adjusted gross income (AGI) or adjusted gross income from the total casualty losses for the year. For example, if your AGI is $25,000 and your insurance company paid for all of the losses you incurred due to flooding except $3,100, you would first subtract $100 and then reduce that amount by $2500. The amount you could deduct as a loss would be $500.
- Taxpayers claiming the disaster loss on a prior year’s return should put the disaster designation in red ink at the top of the form. Doing so alerts the IRS to accelerate the refund processing, waive the usual fees, and expedite requests for copies of previously filed tax returns for affected taxpayers who need them to apply for benefits or to file amended returns claiming casualty losses.
Claiming disaster-related casualty losses
Affected taxpayers in a Presidential Disaster Area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original (2021) or amended return for last year (2020) will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors. If you choose to deduct losses on your 2020 tax return, you have one year from the due date of the tax return to file.
This column is intended as information only and should not be taken as advice. Taxes are almost always complex and mistakes can be costly. Consider consulting a tax professional.
Norm Grill, CPA, (N.Grill@GRILL1.com) is managing partner of Grill & Partners, LLC (GRILL1.com), certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203-254-3880.