Tax Breaks That Help When Disaster Strikes
Financial Losses and Tax
When disaster strikes, taxes are probably not on your mind. Yet it is reassuring to know that when your property is damaged, destroyed or stolen, you may qualify for tax relief for losses not covered by insurance. To assist victims of property loss or damage in understanding the tax breaks that may be available to them, the Michigan Association of CPAs explains the casualty loss tax deduction and how to claim it.
DEFINING A CASUALTY LOSS
According to the IRS, a casualty is defined as property that is damaged or destroyed from a sudden, unexpected or unusual event. Deductible casualty losses may result from hurricanes, lightning, fires, floods, earthquakes, vandalism, theft and similar disasters.
Losses that are gradual and progressive do not qualify for the casualty loss deduction. Examples of non-deductible losses include damage from mildew, erosion, wood rot, termites or other insect infestation.
PROVING YOUR LOSS
To deduct a property casualty loss, you must prove that there was a casualty loss and when it occurred. To meet this requirement, it is helpful to have photos of the property, news clippings describing the event and police reports, if applicable. You must also have proof that you owned the property or that you are contractually responsible to the owner for any damage to the property. In the case of theft, you should have records documenting the loss and records showing when you discovered items missing, as well as proof that you were the owner of those items and the cost of them.
For both casualty and theft losses, you should retain records of any insurance reimbursement you received or expect to receive for the loss or damaged property. You are not required to submit your documentation with your tax return, but you should have it available in the event of an audit.
CLAIMING A CASUALTY DEDUCTION
To claim a casualty loss deduction, complete Form 4684, Casualties and Thefts, and use Schedule A to itemize your loss deduction. Both of these forms must be attached to Form 1040. Calculating your loss requires that you determine the adjusted basis in the property before the casualty loss and the decrease in the fair market value of the property as a result of the casualty or theft. From the smaller of these amounts, you must subtract any insurance or other reimbursements that you received.
To arrive at your adjusted basis, start with your original cost to acquire the property, add any capital improvements you have