There's no way to plan for a disaster. But there is recovery help from an unexpected source: the Internal Revenue Service.
In most instances, you can count unforeseen casualty losses as itemized deductions. Of course, you have to fill out extra paperwork and keep good records.
And when a disaster is so severe that it's declared a major disaster area by the president, you get additional choices on when to file the tax claim. This could get you much-needed money for repairs sooner.
Whether your claim is a more routine loss or the result of a presidentially declared disaster, 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.
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.
Examples cited in the IRS literature include:
|•||Burglaries and thefts.||•||Earthquakes.|
|•||Storms, such as ice storms and blizzards.||•||Vandalism.|
|•||Floods.||•||Drought (if sudden in nature).|
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. You also have to subtract any insurance money you got for the loss.
For example, after collecting from your homeowners insurance, you were out of pocket $6,000 in damages from a flood. You subtract $100 from that $6,000 loss, giving you $5,900. Then you subtract 10 percent of your AGI, which for our example, let's say, is $50,000, giving you an amount of $5,000. That leaves you a casualty loss claim on your tax return of $900 ($6,000 - $100 - $5,000 = $900).
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.