Claim Your Casualty Loss This Year – Or Last Year?

Watching the news every night, you would think natural disasters are a regular occurrence. Hurricanes, tornadoes, floods and earthquakes disrupt lives, challenge communities and cause significant financial losses.

If you are the victim of a casualty and you live in a federally declared disaster area, there are special tax rules to help you recover some of your losses. These rules are different from the rules for ordinary casualty losses.

For tax purposes, a "casualty" is an identifiable, sudden, unexpected or unusual event that damages or destroys your property.

In most cases, when individuals have a casualty loss, they can deduct:

  • The lesser of (1) the property's adjusted basis – the cost of the property plus or minus an increase or decrease for things like improvements or depreciation – or (2) the fair market value of the property – the price someone would pay for the property on the open market  
  • Minus
    • Insurance money you reimbursed for the loss
    • $100
    • 10 percent of adjusted gross income (AGI)

To claim a casualty loss deduction, an individual must itemize deductions and, generally, claim the deduction in the same year the loss was incurred.

There are special rules if you are in a federally declared disaster area. The Federal Emergency Management Agency keeps a list of these areas by year and state.

For casualty losses incurred in a federally declared disaster area, you can claim the deduction either in the year the loss occurs or in the immediately prior year. That means, for a loss sustained in 2011, you do not have to wait until you file your 2011 tax return to claim the loss. You could amend your 2010 tax return now and hopefully hasten the receipt of a refund check from the IRS. Also, if your AGI is lower in 2010 than in 2011, your deduction may be greater by amending the 2010 return.

For example, assume you live in a county that was declared a disaster area in 2011 because of a tornado. The damage to your home was $10,000 in excess of your insurance coverage. Assume your AGI for 2010 was $50,000 and for 2011 it is $60,000. If you claim the loss on your 2011 return, the loss will be first reduced by the $100-per-casualty floor to $9,900 and then reduced by 10 percent of your 2011 AGI ($6,000) to $3,900.

If you instead file an amended return for 2010 and claim the loss in that year, the loss will be reduced by the $100 threshold to $9,900 and then reduced by 10 percent of your 2010 AGI ($5,000) to $4,900. The result is an additional $1,000 deduction in 2010.

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