Disaster Area Losses
General Casualty Loss.
A casualty loss is the result of damage, destruction, or loss of property from any sudden, unexpected, or unusual event, such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. Normal wear and tear would not be included.
Disaster Loss.
A disaster loss must be declared by the President as a federal disaster and eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Major disasters and emergency declarations are both included under the Act.
Taxpayers within a declared disaster area may elect to claim their loss either:
- In the year of occurrence; or
- In the prior year, even if through amending tax return.
Factors evaluated when determining the more beneficial reporting year for the loss include the following:
- Urgency for cash. The rules for disaster losses allows a taxpayer to amend a prior year tax return in order seek funds. Depending on the time of year, filing date, and need for immediate cash, a taxpayer may choose to claim the losses in the prior year.
- Tax bracket for each year. One tax year may have a higher bracket than the other year and provide a substantial tax benefit from the other year.
- Other taxes. Some taxes have thresholds to consider, such as self-employment taxes. One year may have a clear advantage over the other.
- Net operating loss created. Should the disaster loss be unable to be fully deducted in the chosen year, it can be carried back and forward to future years. The carryback rules should be examined, along with those prior years, to determine the advantage of claiming the loss in the prior year.
Business/Personal loss limitations.
Business Losses. Business Losses are fully deductible without limitations.
Personal Losses. Personal losses are reduced in two ways:
- $100 per event, plus
- 10% of the taxpayer’s total Adjusted Gross income for all the total events of the year
Calculating the loss
- Generally, each loss begins with the lesser of the following:
- The cost or adjusted basis, or
- The decrease in fair market value.
Cost or adjusted basis. Basis is generally what the taxpayer paid for the property, with adjustments to the property. This would include subtractions for depreciation or additions for improvements.
Fair market value. Fair market value is the price a willing buyer would pay and a willing seller would accept if both are aware of all the relevant facts.
- Then, subtract any reimbursement or anticipated reimbursement (such as insurance).
- Taxpayers are expected to file timely claims
- The part of loss not covered (such as deductible), are not subject to this rule.
- If personal loss, apply the per event and AGI limitations.
Extensions. The IRS will grant extensions for filing and payment of tax, waiving penalties and possible late filing payments for taxpayers in zones declared by the President as a federal disaster.
Gains. Special rules apply for gains resulting from insurance when property was destroyed in a disaster, in particular a home.
Sources: IRS publication 547: Casualties, Disasters and Thefts; Tax Topic 515 – Casualty, Disaster, and Theft Losses (including Federally Declared Disaster Areas)
