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| The Basics | Uncle Sam's gift to disaster victims: a tax break
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The damage, destruction or loss of your property may mean you can deduct the cost from your taxes. And many us took huge losses in 2005. Check the details on what losses are eligible.
By Bankrate.com
There's no way to plan for a disaste, especially not the disasters that hit the United States in 2005. But there is recovery help from an unexpected source: the Internal Revenue Service.
You can count these unforeseen casualty losses 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.
First, your loss must meet IRS deductibility guidelines. The agency classifies a casualty 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 (Yes, Katrina, Rita and Wilma count.)
- 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.
How much can I deduct?
After you've established that your loss is deductible, it's time to figure out exactly how much you can deduct. The IRS sets two limits: First, you must reduce your loss amount by $100. The remainder then must be more than 10% of your adjusted gross income and is reduced by that 10%. You also have to subtract any insurance money you got 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.
When the president declares a disaster
Victims in presidentially declared disaster areas -- such as the Gulf Coast, which was battered by Hurricanes Katrina and Rita or tornado, flood, earthquake or other calamity -- get special consideration. In these cases, taxpayers can claim their losses in the tax year the disaster struck or as if it 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. This often is the case for individuals who didn't itemize deductions the prior year.
Yes, the paperwork is a hassle. But the IRS provides additional details in Publication 547 on casualties, disasters and thefts. The agency also has a workbook to help you track your losses. (See links at left, under "related sites".)
If you're the victim of a major disaster, claiming your losses on your tax return could help you rebuild your property as well as your bank account.
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