Extreme weather on the rise?
Hurricanes in Florida. Hailstorms in Colorado. Fires in California. If it seems like severe weather is on the rise, you’re not imagining things: NOAA’s National Centers for Environmental Information (NCEI) reported this February that, “The past three years(2016-2018) have been historic, with the annual average number of billion-dollar disasters being more than double the long-term average.” Damage to homes (including total loss of a structure) figures largely.
Work Ahead to Minimize Potential Losses (And Smooth Potential Future Deductions)
Before you look for ways to offset potential damages with tax deductions, you need to exhaustively document what might be lost, both for insurance and tax purposes.
Of special importance:
- Make sure you know what your policy covers
- Have a backup repository of critical documents all in one place
- Conduct a room-by-room inventory of your stuff (and take pictures)
Casualty Loss Deductions Will Need to Stem from a Federally Declared Emergency
The Tax Cuts & Jobs Act (TCJA), which became law on Dec. 22, 2017, severely restricted the category of things that can be deducted as personal casualty losses. To offset any losses, damage and loss have to occur during a federally declared disaster.In general, that means sudden, destructive events (like terrorist attacks or floods) and rules out things like routine accidental breakage, progressive deterioration (termites or mold) or even a car accident where the taxpayer was determined to have been willfully negligent! The federal government has, on a case-by-case basis, relaxed some of the deduction requirements, like they did in the wake of Hurricanes Harvey, Irma, and Maria via an act of Congress.
What Amount is Allowed for a Qualifying Loss Write-off?
What you can claim as a deductible loss is subject to Treasury rules that gauge the hit you took in terms of sale value or fair market value of your damaged goods.
These broad stipulations apply:
- Damaged items/property must exceed $100 in value
- Aggregate losses from a tax year can only be deducted if they exceed casualty gains(such as allowing for things like insurance payouts) and also exceed 10% of your adjusted gross income.
There are other important details covered on the relevant IRS doc, Form 4684, which is calculated separately and then rolled into your 1040 as a line item.
In addition, different rules apply in the case of personal vs business losses. Some of this can get quite complex for the average taxpayer; if you have incurred damage to either home or business property, you may want to check in with your tax preparer,who can help walk you through the fine print and make the road back to recovery a bit less stressful and complex