Casualty Loss Deductions and Changes as a Result of the Disaster Tax Relief Act
The Disaster Tax Relief Act was passed by Congress, and signed by President Trump, to assist those affected by the recent Hurricanes in the 2017 season, easing the restrictions of the normal casualty loss rules due to the recent disasters.
The benefits of this act are:
- It eliminates a requirement that personal casualty losses must exceed 10% of adjusted gross income to qualify for a deduction. The casualty loss deduction is also now available to taxpayers who do not itemize deductions.
- Casualty Losses include loss of food, or other spoilage due to lack of electricity, landscaping, roofing, etc. (please see how to calculate your losses below).
- Additionally, it also gives hurricane victims penalty-free access to retirement funds used for qualified hurricane expenditures, and temporarily suspends limitations on the deduction for charitable contributions to hurricane relief made before year-end.
- NOTE – this act applies for personal casualty losses in excess of $500.
Things to consider as you evaluate your losses under this Act and with insurance:
- Report all casualty losses to your insurance carrier if you have insurance coverage – EVEN if the deductible is higher than the actual losses.
- The casualty losses related to this Disaster Tax Relief Act can be deducted on EITHER the original return for the year the loss occurred (2017), OR on an amended return for the year immediately preceding the year in which the casualty losses occurred (2016).
- No casualty loss deduction is allowed to the extent the loss is reimbursable. If the reimbursement exceeds the tentative loss, the taxpayer may then have taxable income.
How to calculate your losses:
Here are three steps to assist in calculating the casualty losses:
- Determine the adjusted basis of the property before the loss.
- Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft.
- From the smaller amount determined in steps 1 and 2, subtract any insurance or other reimbursement received, or expected to receive. Also subtract the baseline cost of $500.
Therefore, to calculate the decrease in FMV from a casualty, a determination must be made of the actual price the property could have sold for immediately before and immediately after the loss. The IRS has worksheets to assist in the calculation of loss, and those can be accessed here and here.
Other measures can be used in calculating the loss due to casualty, such as cleaning up and making repairs. Many situations will require an independent appraisal of the loss before action can be taken. The appraiser must be a recognized expert in the field relating to the property being appraised. Even though appraisal fees can be significant, the lack of an appraisal can subject the taxpayer to penalties and other potential issues.
If you have questions on this, or other tax-related matters following the recent string of hurricanes, please do not hesitate to contact us.
We hope that you are all doing well in this very active hurricane season, and wish you the very best.
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