disaster damage tax deduction

Tax Time: Deducting Losses for Disasters


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30 October,2012

With Hurricane Sandy causing concern, many are wondering what the latest natural disaster could mean for their taxes.

When you suffer a loss due to a disaster, there is a good chance that you will be able to take a tax deduction for it. You need to fill out the right paperwork, of course, and you will need to to make sure that you calculate your deduction properly.

While there is no way to completely recoup all of your losses in a disaster, the IRS does allow for some help as you try to rebuild.

Things to Remember when Deducting a Disaster Loss

Any disaster can count as a tax deduction. However, you do need to realize that you probably won’t be able to deduct the entire amount of your loss. A deduction only serves to reduce your taxable income. It isn’t a dollar for dollar reduction in what you owe on your taxes. Here are some things to keep in mind:

  • Federal Disaster Area: This can help ease the process of showing that you really did experience a disaster. With this designation, you can amend your previous year’s tax return, or take last year’s loss for this year. However, you can still claim a deduction even if you aren’t in a federal disaster area. You can only claim a loss in one year, though.
  • Form 4684: You use the form for Casualties and Thefts to claim your deduction.
  • Insurance: If your insurance paid for some of the costs, you can’t claim those for a deduction.
  • AGI requirement: Your deduction claim must amount to more 10% of your AGI in order to qualify for a disaster deduction.

How to Figure Your Disaster Deduction

When you claim a tax deduction for a loss due to a disaster, you need to follow a specific formula to figure how much of a deduction you have. First, you need to figure out the adjusted basis for your home. Your adjusted basis is the purchase price of the home plus its improvements, or it will be the reduction in the fair market value of your home, due to the disaster. Your adjusted basis is whatever of these items is less.

Next, you need to subtract the amount of money your insurance company provided to help you offset the cost of the loss. After you have made that calculation, you subtract $100. Then, you figure out your AGI, and then take 10% of that number. If your calculations come to at least 10% of your AGI, then you can deduct the difference.

Say your home is damaged in a hurricane. You have a cost basis of $30,000 less than the fair market reduction of $60,000 your home suffered. You have the proper insurance, and it covers $18,000 of the damages. Your remainder is $12,000 after you subtract your insurance payments from your cost basis. Now you subtract $100 for $11,900.

It’s time to look at whether you can take the tax deduction. Let’s say your AGI is $42,000. 10% of that is $4,200. The $11,900 is more than 10% of your AGI, so you can take the deduction. But you don’t get the full amount; you get the difference. So you subtract $4,200 from $11,900 and the amount of your deduction is $7,700.

As long as you fill out the paperwork properly, and as long as you aren’t trying to double deduct, you should be able to take a deduction for a loss related to disaster. If you are unsure, consult with a tax professional, or refer to IRS Publication 547.