Are you eligible for casualty loss deductions?
Hurricane Sandy, referred to as Frankenstorm, bore down hard on the East Coast, and experts estimate that the storm has already caused billions of dollars in damages to businesses and homes. Between flooding, fires and wind damage, many homeowners may have significant repairs ahead of them, some of which may not be covered by their standard insurance policy. However, individuals may receive some relief from Uncle Sam in the form of casualty loss deductions.
Victims who suffer losses from a federally-declared disaster have the option of writing off these expenses on their income taxes. They may do so for the tax year in which the disaster occurred, or deduct the losses on their return for the previous year. For example, those who are eligible to deduct losses from Hurricane Sandy may do so on their return for 2012 or 2011. Losses are reported on Schedule A of taxpayers' returns, and those who plan to claim losses must itemize their deductions. It may benefit individuals to meet with their tax preparer to calculate the numbers for both years and determine which option benefits them the most financially.
For tax reasons, casualty losses are defined as damage, destruction or loss of property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. However, damage from normal wear and tear or progressive deterioration does not qualify under these rules. Those who experience damages to their home, household items or vehicle may only deduct losses not covered by insurance, or must reduce the loss by the amount of any reimbursement. Further, the amount of any casualty deduction must be the lesser of the adjusted basis of their property or the decrease in fair market value of their property as a result of the casualty or theft.
Federal limits to deductions
While individuals may receive some relief from this tax benefit, there are certain rules that restrict how much they may write off on their federal income taxes. Once individuals determine the value of their losses, they must reduce this number by $100. After they have made this calculation, they must further reduce the remainder by 10 percent of their adjusted gross income. For example, suppose an individual with an adjusted gross income of $30,000 suffers a $5,000 property loss. That person must first deduct $100 from that total, dropping the deduction to $4,900. Afterwards, they must further reduce this amount by $3,000 - 10 percent of their AGI - which would qualify them for a total deduction of $1,900.
Individuals who are unsure of whether they qualify should contact a tax professional following losses.
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