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There's no way to
plan for a disaster. But there is recovery help from
an unexpected source: the Internal Revenue Service.
You can count 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 loss you suffered. But every little bit
helps. For major disasters, it's usually worth the effort
to claim
the tax write-off.
What
counts as a casualty?
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 man-made 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 due to disease.
Figuring
the deduction amount
After you've established that your loss is allowable,
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, and the remainder then must be
more than 10 percent of your adjusted gross income and
is reduced by that 10 percent. You also have to subtract
any insurance money you got for the loss.
Taxpayers who suffered losses in last
year's hurricane season get an additional break this
filing season in computing their deductible loss amount.
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.
Tax
result of your loss claim
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.
Victims in presidentially
declared disasters areas -- regions hit by hurricanes,
tornadoes, floods, earthquakes or other calamities --
get special consideration. In these cases, taxpayers
can claim their losses in the tax year the disaster
struck, or they can claim it 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.
The deadline for choosing
this option usually is the due date of a filer's current
year return. This means you can file the amended return
for the previous year by the filing deadline for the
year in which the disaster actually occurred. For example,
if in 2006 you suffered a casualty loss due to a Presidentially
declared disaster, you can amend your 2005 return up
until the current April 17 filing due date to claim
the losses in that prior tax year.
Yes, the paperwork
is a hassle. But the IRS provides additional details
in Publication
547, Casualties, Disasters and Thefts.
The agency also has a workbook
to help you track your losses, as well as Publication
2194, Disaster Losses Kit for Individuals, which
consolidates the tax-related disaster information you'll
need.
If you're the victim
of a major disaster, claiming your losses on your tax
return could help rebuild your property as well as your
bank account.
Freelance writer Kay
Bell writes Bankrate's tax stories from her home in
Austin, Texas, and blogs each day on tax topics at Don't
Mess with Taxes.
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