Recent weather events are stark reminders that disasters can occur at any time – often with staggering human and financial costs. If you are an unlucky victim of a disaster, you may receive help from insurance and federal disaster aid. The tax code can also offer some needed relief. You may be able to take an itemized deduction for part of your loss. In tax terms, it is a “casualty loss,” and it can also apply to events such as a car crash, a house fire, or theft. Here are the basics.
* The loss or damage must be due to an unexpected and sudden event. Losses due to slow deterioration over the years, such as rot, rust, or insect damage, do not qualify.
* Your tax deduction will not equal your total loss. You must subtract any insurance or other reimbursement. Then you must also deduct $100 for each loss and 10% of your adjusted gross income.
* Your loss may also be limited by your adjusted basis in the property. That is generally what you paid for it, plus or minus any improvements or previous losses.
* In a widespread disaster, the area may be classified a “Presidentially declared disaster area.” If that happens, you have a special option. You can claim your casualty loss against the current year’s taxes or you can amend the previous year’s return and claim your loss against that year’s taxes. The latter usually generates a faster refund, but it may change the amount of your deduction.
If you suffer a casualty loss, please contact Simons Bitzer at (317) 782-3070. We will explain the rules and help you claim the maximum possible tax benefit.