DISASTER-AREA LOSSES
Generally, casualty and theft losses can be claimed only on Form 1040 for the year in which casualties occurred or thefts are discovered. There is an extra tax break for individuals who experience losses in places determined to be disaster areas eligible for federal assistance, something that often happens as a result of unpredictable misfortunes such as hurricanes. Disaster victims have the option to deduct such losses on the return for the year immediately before the year of the disaster, should amending that return be more advantageous than claiming it on the current year’s return.
To illustrate, a landslide damages Amy Cook’s house in 2008. Amy has a loss of $8,000 after subtracting $100 and any insurance proceeds she might recover. Her tax return shows an AGI of $70,000. With those numbers, there is no deduction for the first $7,000 (10 percent of $70,000); as a result, only $1,000 is deductible. (If her AGI were higher than $80,000, the entire $8,000 would be nondeductible.)
But suppose Amy qualifies to claim a deduction for a disaster area loss. Then she may choose between taking a deduction of $7,500 ($8,000 reduced by the $500 per occurrence rule) on her return for the year of the loss or on the return for the prior tax year, whichever proves the most advantageous. It makes no difference that Amy already filed her return for the preceding year. Selecting the prior year could mean a quicker refund now, when she needs a cash infusion to help pay for property repairs or replacements.
DISASTER LOSSES IN NON-DESIGNATED AREAS
In some situations, a damaged residence might be in close proximity to a disaster area, but not actually within the officially designated area. In that case, the deduction for a casualty loss can be claimed only on the return for the year of the loss and not on the return for the prior year. This is so even thought the damage was attributable to the same event that resulted in an official designation for the neighboring area.
An example: In August, 2004, Hurricane Charley initially came ashore in Florida at Sanibel Island, located in Lee County and just outside of Fort Myers. Then, it immediately ricocheted off Sanibel and moved into Port Charlotte, located in Charlotte County. While President Bush declared Charlotte County a disaster area, he did not do so for Lee County. Consequently, tax breaks for disaster losses were unavailable to Lee County property owners, though their losses might have been just as devastating as those suffered by their Charlotte County neighbors.
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."
