Once the loss is determined, use Form 4684 to figure the deductible amount of your casualty loss. You must reduce the initial loss claim amount by any insurance or other reimbursement you have received. If you have insurance on your property, you must submit a claim to use the damage to it as a casualty loss. In other words, you can't decide you don't want to pay the deductible your insurance would require and then use the total, unreimbursed loss amount as your casualty claim. And all insurance payments must be used to repair or replace your property, or any excess not used for these purposes could be a taxable gain to you.
Then this is where the $100 mentioned earlier comes into play. You further reduce your loss by that amount before finally reducing the total yet again by 10 percent of your adjusted gross income to get to your final casualty loss deduction.
Figuring the tax costs of damages
The following work sheet shows the computations that a hypothetical Tom Taxpayer, who suffered through a federally declared flood disaster, had to make. The water substantially damaged Tom's home, the property inside and his car. Insurance covered only a part of the losses.
Tom's adjusted gross income is $60,000, and that's what he uses to figure his casualty deduction. Tom was off work -- and without pay -- for the week that his employer was closed during a flood in May 2014. Unfortunately, Tom can't claim the lost income. The IRS provides no deduction for missed wages, even in the event of federal disasters.
Form 4684 work sheet
|1. Original property cost||House and land: $100,000||Property: $25,000||Auto: $18,000|
|2. Fair market value (basis) before disaster||House and land: $150,000||Property: $15,000||Auto: $12,000|
|3. Fair market value (appraisal) after disaster||House and land: $75,000||Property: $5,000||Auto: $4,000|
|4. Decrease in value (line 2 minus line 3)||House and land: $75,000||Property: $10,000||Auto: $8,000|
|5. Smaller of line 1 or line 4||House and land: $75,000||Property: $10,000||Auto: $8,000|
|6. Insurance reimbursement||House and land: $50,000||Property: $5,000||Auto: $4,000|
|7. Loss after reimbursement (line 5 minus line 6)||House and land: $25,000||Property: $5,000||Auto: $4,000|
|8. Total loss (total of line 7 entries)||Total: $34,000|
|9. Subtract $100||Total: $100|
|10. Loss after $100 rule||Total: $33,900|
|11. Subtract 10% of adjusted gross income||Total: $6,000|
|12. Deductible disaster loss amount||Total: $27,900|
Now it's time to figure out the "real money" value of Tom's deduction. Remember, Tom's (and your) deduction doesn't directly translate to the amount of whatever refund he (or you) will receive. You must refigure your taxes using this new deduction (entered on Schedule A and Form 1040X) to determine just how much you'll get back.
Tom, a single filer, had decided to amend his 2013 tax return since he took only the standard deduction of $6,100 when he filed for that year. His much larger, disaster-related itemized deduction amount, depending upon how much he paid in taxes that previous year, likely produced a nice refund.