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| The Basics | Write off your disaster damages
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What your insurer doesn't cover, the tax man does. Here's how to deduct your disaster losses and get a refund in your hands as quickly as possible.
By Jeff Schnepper
2005 was the year of the killer storms: Katrina, Wilma, Rita. But they are not the only natural disaster to hit the United States. In 2004, Florida was hit by four hurricanes. Los Angeles was hit by flooding. Forest fires are a problem every summer in the arid West.
There's no way to know when a disaster will strike. But, in addition to insurance, which is very important, there is some recovery help from a source that may surprise you: the Internal Revenue Service.
These unforeseen casualty losses count as itemized deductions. Of course, you have to fill out extra paperwork and keep good records. And you won't recover dollar-for-dollar the financial costs you suffered. But every little bit helps. For major disasters, it's usually worth the effort to claim the tax write-off.
For victims of Hurricane Katrina, which flooded New Orleans and leveled whole parts of the Gulf Coast of Mississippi and Alabama, Congress and the Internal Revenue Service came up with a series of breaks. These include larger breaks for charitable work for storm relief, breaks for housing people whose homes were damaged in the storm, the ability to tap into retirement accounts without penalty to get things started again and tax breaks for businesses who create jobs to deal with the storm. Check out the Katrina breaks here.
With any disaster, costs quickly add up.
You cant replace the photos and emotional treasures, but insurance will help heal the hurt on the loss of other assets. Check out your property insurance and auto policies now. Many policies exclude or limit disaster coverage. If youre in a potential disaster area, make sure you have any special coverage you may need.
Insurance wont cover everything
If youre not 100% covered by insurance -- and few people are -- you can get some money back from the IRS. If your loss was not caused by Katrina, here's how the tax code comes into play.
Your loss must meet IRS deductibility guidelines. The agency classifies a casualty loss as the damage, destruction or loss of property resulting from a sudden, unexpected or unusual event. The losses can result from natural or manmade disasters.
Examples cited in the IRS literature include:
- Fires
- Burglaries and thefts
- Storms, such as ice storms and blizzards
- Tornadoes
- Floods
- Hurricanes
- Earthquakes
- Vandalism
- Mudslides
- Drought (if sudden in nature)
Natural wear and tear isn't a casualty loss. The IRS won't accept claims for lost property, termite damage to your home or the death of your prize elm tree to disease.
Your deduction is subject to limits. The IRS sets two:
- First, you must reduce your loss amount by $100.
- The remainder then must be more than 10% of your adjusted gross income (AGI). That amount is reduced by that 10% of your AGI.
And, yes, you also have to subtract any insurance money you received for the loss.
You need Form 4684 to figure and report your casualty loss and Schedule A to itemize your loss deduction. Attach both of these to your individual income tax return Form 1040. You don't have to include supporting documents with your return, but you need those records to help you complete Form 4684 -- and to verify your expenses and losses, if the IRS ever questions the deduction.
Then you have to figure out the "real money" value of your deduction. Deductions don't directly translate into tax dollars saved, so a casualty deduction of $5,000 won't get you a five-grand refund. Rather, deductions reduce your taxable income. The less taxable income you have, the smaller your tax bill.
After you determine your casualty loss deduction, you must refigure your taxes using the new taxable income amount to see just how much of a refund you'll get.
Heres how a deduction amount might be calculated for a person with an adjusted gross income of $100,000 and a loss of $150,000.
| How much can you deduct from a disaster? | | Loss | $150,000 | | Insurance settlement | -$100,000 | | Adjusted loss | $50,000 | | Less $100 | -$100 | | $49,900 | | Less 10% AGI | -$10,000 | | Total deduction | $39,900 | | Tax reduction if in a 28% bracket | $11,172 |
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An extra break if the president declares a disaster
Victims in presidentially declared disaster areas -- regions hit by a hurricane, tornado, flood, earthquake or other calamity -- receive special consideration. Taxpayers can claim their losses in the tax year the disaster struck, as if it had happened the year before.
Many taxpayers find that by filing an amended return and claiming the loss for the previous tax year, they get a bigger refund (and get it faster). This often is the case for those who didn't itemize deductions the prior year.
Yes, the paperwork is a hassle. But the IRS provides additional details in Publication 547. The agency also has a workbook to help you track your losses. (See links at left, under Related Sites.)
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