The predisaster value is your "adjusted basis." For homes, this usually is the cost of the property plus certain adjustments such as improvements that add to the structure's value; for vehicles or other personal property, it may be depreciation that reduces its value. Get an appraisal for the post-disaster value of the property and compare it with your adjusted basis. The difference between the two amounts is your loss from the casualty.
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.
Next, the IRS requires you to further reduce your loss by $100. Finally, you must reduce the total yet again by 10 percent of your adjusted gross income to get to your final casualty loss deduction.
Figuring the cost of damage
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 July 2008. 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
|
| $100,000 | $25,000 | $18,000 | |
| $150,000 | $15,000 | $12,000 | |
| $75,000 | $5,000 | $4,000 | |
| $75,000 | $10,000 | $8,000 | |
| $75,000 | $10,000 | $8,000 | |
| $50,000 | $5,000 | $4,000 | |
| $25,000 | $5,000 | $4,000 | |
|
| $34,000 |
| $100 |
| $33,900 |
| $6,000 |
| $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, decided to amend his 2007 tax return since he took only the standard deduction of $5,350 when he filed that year. His much larger, disaster-related deduction amount should, depending upon how much he paid in taxes that previous year, produce a nice refund.