10 Tips Taxpayers should know about Deducting Casualty Losses
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The IRS wants taxpayers to know it stands ready to help in the event of a disaster. If a taxpayer suffers damage to their home or personal property, they may be able to deduct the loss they incur on their federal income tax return. If their area receives a federal disaster designation, they may be able to claim the loss sooner.
1. Casualty loss.
A taxpayer may be able to deduct a loss based on the damage done to their property during a disaster. A casualty is a sudden, unexpected or unusual event. This may include natural disasters like hurricanes, tornadoes, floods and earthquakes. It can also include losses from fires, accidents, thefts or vandalism.
2. Normal wear and tear.
A casualty loss does not include losses from normal wear and tear. It does not include progressive deterioration from age or termite damage.
3. Covered by insurance.
f a taxpayer insured their property, they must file a timely claim for reimbursement of their loss. If they don’t, they cannot deduct the loss as a casualty or theft. Reduce the loss by the amount of the reimbursement received or expected to receive.
4. When to deduct.
As a general rule, deduct a casualty loss in the year it occurred. However, if a taxpayer has a loss from a federally declared disaster, they may have a choice of when to deduct the loss. They can choose to deduct it on their return for the year the loss occurred or on an original or amended return for the immediately preceding tax year.
5. Amount of loss.
Figure the amount of loss using the following steps:
- Determine the adjusted basis in the property before the casualty. For property a taxpayer buys, the basis is usually its cost to them. For property they acquire in some other way, such as inheriting it or getting it as a gift, the basis is determined differently.
- Determine the decrease in fair market value, or FMV, of the property as a result of the casualty. FMV is the price for which a person could sell their property to a willing buyer. The decrease in FMV is the difference between the property's FMV immediately before and immediately after the casualty.
- Subtract any insurance or other reimbursement received or expected to receive from the smaller of those two amounts.
6. $100 rule.
After figuring the casualty loss on personal-use property, reduce that loss by $100. This reduction applies to each casualty-loss event during the year. It does not matter how many pieces of property are involved in an event.
7. 10 percent rule.
Reduce the total of all casualty or theft losses on personal-use property for the year by 10 percent of the taxpayer’s adjusted gross income.
8. Future income.
Do not consider the loss of future profits or income due to the casualty.
9. Form 4684.
Complete Form 4684, Casualties and Thefts, to report the casualty loss on a federal tax return. Claim the deductible amount on Schedule A, Itemized Deductions.
10. Business or income property.
Some of the casualty loss rules for business or income property are different from the rules for property held for personal use.
Alfredo Gaxiola has worked on numerous IRS problem cases and has successfully settled with the IRS to release liens on houses, bank accounts and wages and, if needed, setting a payment installment plan that is not burdensome for the client. He has conducted appeals before the U.S. Tax Court and obtained favorable resolutions in reducing the tax debt of his clients. Mr. Gaxiola served as Treasurer of Camara de Empresarios Latinos, one of the largest and strongest Hispanic organizations in the city of Houston. He has conducted financial and accounting seminars for the Houston Small Business Development Corporation, as well.
CPA in Houston.
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