Every year, natural disasters such as hurricanes strike repeatedly, affecting tens of thousands of Americans. Fortunately, individuals whose homes, household goods and other kinds of properties are damaged or destroyed by such disasters can count on a helping hand from their uncle -- Uncle Sam, that is. Internal Revenue Code Section 165 authorizes immediate relief in the form of deductions for casualty or theft losses. The IRS defines qualifying losses at those caused by identifiable events that are "sudden, unexpected or unusual."
This includes hurricanes, fires and floods as well as a lengthy list of other unpredictable misfortunes such as auto accidents, earthquakes, landslides, lightning, riots, sonic booms, storms, terrorist attacks, tornadoes, tsunamis, vandalism, and volcanic eruptions. Then there are losses from theft — a category of offenses that includes burglaries, extortions, embezzlements, robberies, and swindles.
The IRS stands ready to partially ease the hurt for those who suffer serious property damage. The agency allows them to write off uninsured losses on their tax returns. But the law precludes it from furnishing solace for penny ante losses. Thus, the permissible write-off is shockingly smaller than many disaster survivors anticipate.
For starters, long-standing regulations generally prohibit any write-offs for theft or casualty losses by individuals who use the standard deduction. Only those persons who forgo the standard deduction -- because it is more advantageous to itemize or list deductions on Form 1040’s Schedule A -- are eligible for tax relief. Even then, casualty or theft deductions are subject to several limitations.
- First, File Claims and Account for Settlements.
The IRS requires individuals to reduce their losses by any insurance settlements or other reimbursements they have received or expect to receive. They also must do without any deductions if they fail to file claims. It matters not that submitting claims might provide their insurers with excuses to boost deductibles, increase premiums or even cancel coverage. However, the IRS does concede that write-offs are allowable for amounts not covered by insurance, including deductibles.
- Second, Subtract $100 Per Loss.
The agency usually mandates another subtraction of $100 for each loss. But it orders only one $100 reduction when the same event damages several items, for example: The same flood damages a person’s home and detached garage or a year-round home and a summer cottage. The same is true when a hurricane damages a person’s dwelling twice — e.g., first by winds and then by high waves.
- Third, Losses Must Exceed 10 Percent of AGI.
Uninsured losses generally are allowable only to the extent that their total exceeds ten percent of AGI, adjusted gross income. Just how much of a deduction is allowable, then, when someone suffers losses of $20,000 after insurance recoveries and AGI is $100,000? It shrivels to just $9,900 — $20,000 minus $100 minus $10,000 (ten percent of AGI).
Julian Block is an attorney based in Larchmont, N.Y. This article is excerpted from his book, "The Home Seller’s Guide To Tax Savings: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum."
