This month has been a trying month for many of us, most of whom have been affected by the flooding in some way or form. We hope that everyone is okay, and our thoughts are with those who’ve been affected most by this disaster.
For those who’ve had the misfortune of sustaining losses from the flooding, it’s important not to overlook the relief you may be due through claiming deductions for Casualty Losses on your 2016 taxes. While it may not help financially in the short run, it can at least help ease the burden through lowering your taxes this year.
Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return. Even if your losses were partially covered by insurance, as long as you file timely, you may still claim the amount of loss not reimbursed.
What is a Casualty Loss? Simply, it is a loss that results from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. It does not include, however, normal wear and tear or progressive deterioration. The key words are sudden, unexpected, and unusual – for example, rust damage to a metal shed is none of those things, and would not qualify as a casualty loss.
Casualty Losses are deducted on Schedule A, the itemized deduction form. Even if you normally don’t itemize, significant losses may make itemizing the better strategy.
Some examples of deductible casualty losses would include the following:
- Car accidents
- Mine cave-ins
- Sonic booms
- Storms, including hurricanes and tornadoes
- Terrorist attacks
- Volcanic eruptions
Non-deductible casualty losses would include:
- Accidentally breaking articles such as glassware or china under normal conditions
- A family pet
- A fire if you willfully set it, or pay someone else to set it
- A car accident if your willful negligence or willful act caused it
- Progressive deterioration
Of course, if you claim a casualty loss, you will need proof of the loss. The IRS requires the taxpayer to show all of the following:
- The type of casualty (car accident, fire, storm, etc.) and when it occurred
- That the loss was a direct result of the casualty
- That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage
- Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery
One thing to note is that the cost of repairs, or cleaning up after a casualty loss, is not part of the casualty loss itself. Depending on the nature of the loss, these costs may be factored in to the fair market value of the property being repaired or cleaned.
Also, you may not deduct losses covered by insurance, unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement.
Calculating the Casualty Loss Deduction
Casualty losses are limited by a $100 threshold per loss event and an overall threshold of 10% of your adjusted gross income (AGI). For example, a taxpayer with an adjusted gross income of $100,000 has losses from a fire of $10,000 and losses from a later flood of $5,000. Each loss subtracts the $100 threshold ($9,900 and $4,900), then the total amount ($14,800) is reduced by 10% of the taxpayer’s AGI ($10,000). $14,800 – $10,000 = $4,800 Total Deductible Loss Allowed.
May everyone out there stay safe and dry.