These days, natural disasters, from fire to hurricanes to floods, have become quite common, and the damages can be enormous. Recovering from these losses is not only painful but time-consuming.
In the past, taxpayers could claim losses from fires, floods, accidents, thefts or vandalism on their tax return to the extent not covered by insurance. Under the new law, taxpayers may claim personal casualty losses only if the damage is attributable to a disaster declared by the president.
In this article, we have discussed how the IRS treats the loss incurred due to natural disaster and how to claim it on the U.S. Form 1040, Individual Income Tax Return.
Claiming Natural Disaster Losses on Your U.S. Income Tax Return
Loss Due To Natural Disaster
As per the IRS, any economic loss brought by a natural disaster like a hurricane, flood, fire or other such unpredictable events is considered as ‘casualty loss’. Under the 2018 U.S. tax reforms, casualty loss deductions can only be claimed for federally declared disasters, i.e. disaster which has been announced by the President as a severe natural disaster.
Generally, you may deduct losses to your home, household goods, and motor vehicles on your federal income tax return. The IRS allows U.S. taxpayers to claim these losses on the federal income tax return. In order to claim these natural disaster losses, total loss on personal property must be more than 10% of the individual’s adjusted gross income (AGI).
NOTE that taxpayers cannot claim any loss that is protected through insurance, and the insurance company has reimbursed the associated loss. In such cases, the taxpayer will need to exclude the reimbursed amount from the item’s current value.
Claiming Natural Disaster Loss on U.S. Federal Tax Return
Casualty losses are claimed as itemized deductions on the Federal Income Tax return. To figure the amount of the loss, taxpayers should use the following steps.
- Determine the cost or other basis in the property before the natural disaster. Cost or other basis usually means original cost plus improvements.
- Determine the decrease in fair market value (FMV) of the property as a result of the disaster. The decrease in FMV is the difference between the property’s value immediately before and immediately after the event. FMV is the price for which you could sell your property to a willing buyer.
- From the smaller of the amounts determined in the above steps, subtract the salvage value and any insurance or other reimbursement received or expected to be received.
After the amount of the casualty loss has been determined, the next step is to determine how much is actually deductible. Losses on personal-use property are generally subject to a $100 deductible per event, as well as a 10 percent of adjusted gross income (“AGI”) reduction.
Generally, if a single disaster involves more than one item of property, you must figure the loss on each item separately. Then combine the losses to determine the total loss from that event. An exception applies to real property. Buildings, improvements and landscaping may be claimed together, however, furniture will be considered a separate item.
Normally, you must deduct a casualty loss in the disaster year. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can elect to deduct that loss on your return or amended return for the tax year immediately preceding the disaster year. For example, even though Hurricane Florence occurred in 2018, you may elect to claim losses in 2017. A comparison should be made to determine the effect of the deduction in both taxation years.
Tax Forms To Be Filed In Case of Loss Due To Natural Disaster or Theft
U.S. taxpayers wanting to claim the loss due to a natural disaster on their federal income tax return are required to file Form 4684, and either of the following schedule:
- Schedule A (Form 1040), Itemized Deductions.
- Schedule D (Form 1040), Capital Gains and Losses.
IRS Publication 584 provides a workbook that contains schedules to help the taxpayer figure the loss on the main home, contents and motor vehicles.
Documents to Provide To Claim Loss Due To Natural Disaster
Strong supporting documents are required to prove the damages were due to the natural disaster declared as ‘federal disaster’, how the loss amount was calculated, and that the loss amount is valid.
The records should prove ownership (i.e. the claimant owned the property), whether it was covered through insurance, show the type of casualty (storm, fire, flooding, hurricane, etc.), when it occurred, and most importantly, whether the loss was a direct result of the natural disaster or not.
To determine the decrease in FMV, a taxpayer generally needs a competent appraisal.
However, the cost of repairs may be accepted as evidence of the change in value, but only if:
- The repairs were actually made,
- The repairs were necessary to bring the property back to its condition before the casualty,
- The amount is not excessive,
- The repairs take care of damage only, and
- The value of the property after the repairs is not more than the value of the property before the casualty, simply as a result of the repairs.
Claiming Natural Disaster Loss for Rental Properties
If a taxpayer has experienced a loss with respect to a home that was used as a rental that is business or income-producing property, the calculation of the casualty loss is the same as for personal-use property, using the adjusted basis of the property in the calculation rather than the cost.
In most cases, the IRS will extend the deadline for filing tax returns and payments of certain taxes for victims of natural disasters. For certain victims of Hurricane Florence, the IRS extended deadlines to January 31, 2019 for returns and payments with either an original or extended due date that occurred on or after Sept. 7, 2018 and before Jan. 31, 2019.
For disasters incurred in 2017, congress offered special relief. Taxpayers could claim losses in excess of $500 without regard to whether they exceeded 10% of the taxpayer’s AGI. Furthermore, all affected taxpayers were qualified to take this deduction, regardless of whether they itemized their deductions or claimed the standard deduction. Taxpayers who chose not to itemize their deductions could add these net disaster losses to their standard deduction, In addition, safe harbor rules were introduced to alleviate the burden in determining FMV of residences or personal belongings. Taxpayers opting to rely on these revenue procedures is that the IRS will not challenge taxpayers’ FMV determinations if the taxpayers qualify for and use one of the specified safe-harbor methods.
Taxpayers should note that, no relief has been announced for 2018 yet.
In the wake of Hurricane Florence, the Internal Revenue Service is reminding taxpayers that criminals and scammers try to take advantage of the generosity of taxpayers who want to help victims of major disasters. Be aware of these tax scams.
Along with claiming losses incurred due to a natural disaster, the IRS allows penalty-free delayed tax filing, and in some cases, late tax bill payment facility as well.
Note that this is simply an overview of claiming loss due to natural disaster on the federal tax return. It is highly recommended that individuals affected by natural disaster should reach out to authentic registered tax professional to help you estimate your claimable loss amount, and file the tax return in order to claim the loss in a tax compliant and accurate manner to avoid any future tax issues.
AG Tax LLP Can Help
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