Casualty and Disaster Tax Breaks
How to Make the Most of a Bad Situation
No amount of planning can prepare you for a casualty. If you have suffered
a loss of personal property as a result of a casualty, theft, or disaster,
there are some tax issues to keep in mind.
For starters, a casualty can only result from something that is sudden or
unexpected. Fire, floods, theft, accidents, severe storms, and other acts
of nature that destroy your property can result in a casualty loss. You
are allowed to deduct losses that result from a casualty on your tax
return in the year the loss occurred, but only if you itemize your
deductions.
Your losses must exceed $100 and 10 percent of your adjusted gross income
before you realize a tax benefit. Your loss is limited to the lower of
your adjusted basis (cost) in the property destroyed or the decrease in
the property’s fair market value. The loss is further reduced by any
insurance or other reimbursement. Note that Congress has suspended
the $100 and 10 percent limits for property owners who suffered losses in
2005 from Hurricane Katrina. See the
IRS Hurricane Katrina Information Page for details.
If your casualty was the result of a disaster that took place in a
presidentially declared disaster area, you may elect to deduct the loss on
your prior year’s tax return. This will enable you to amend your return
for the prior year and collect a refund sooner than if you wait to claim
the loss in the year it occurred.
Were all your tax records lost? In most cases, copies can be obtained from
your bank, employer, or other financial institution that reports taxable
income or expenses to you. The IRS will accept reasonable documentation
that you reconstruct and use to substantiate your deductions, such as
charitable contributions, medical expenses, or employee business expenses.
The National Association of Enrolled Agents offers
Tips on Reconstructing Lost Records on the NAEA web site.
