- On September 25, 2017
The recent natural disasters in Florida and Texas bring to view issues concerning tax planning in a disaster situation. You may be able to deduct losses based on the damage done to your property during a disaster. A casualty is a natural disaster like a hurricane, tornado, flood or earthquake. It does not include losses from normal wear and tear or deterioration from age.
A casualty loss for personal-use property is calculated by subtracting any insurance or other reimbursement received or expected to be received from the smaller of (a) the decrease in fair market value of the property as of the result of the casualty or (b) the adjusted basis in the property before the casualty event. After you have figured your casualty loss on personal-use property, reductions to the loss are taken based upon each casualty loss event during the year and your adjusted gross income.
If insurance proceeds are received for a casualty relating to your personal residence or any of its contents, special rules apply which may cause receipt of some funds to be free of gain. For casualties involving business or income producing property, insurance proceeds may cause a gain or loss to the taxpayer using a calculation slightly different than that used for personal-use assets. Further, the rules of involuntary conversions may allow for any gain to not be recognized, whether the property is personal-use or business, if replacement property is purchased. A review by a professional is beneficial to navigate the avenues in this area.
As a general rule, you must deduct a casualty loss in the year it occurred. However, if your loss is due to a federally declared disaster, you can choose to deduct the loss on your return for either the year the loss occurred or on an amended return for the immediate preceding tax year. A review of your expected income for the year the casualty occurred and the prior year is key, as claiming a disaster loss on the prior year’s return may result in a lower tax for that year, and likely produce a refund.
Additionally, the IRS has also provided some relief to certain taxpayers affected by the Florida and Texas hurricanes. For such affected taxpayers, the IRS has extended deadlines for filing various tax returns and making certain tax payments. The IRS has also issued rules to allow retirement plans to provide taxpayers with the ability to obtain loans or hardship distributions which otherwise were not available.
To speak with tax attorney, Vasili Russis, regarding possible deductions due to casualty damages, call 847-382-9130 or email firstname.lastname@example.org.