When a disaster strikes, those affected are left to start the sometimes long and painful process of rebuilding and getting back to life as normal. Although taxes are not often front of mind for disaster survivors, the Internal Revenue Code and IRS offer some assistance to taxpayers who have lost property and records in a disaster.
Casualty Loss Deduction
Although deductions for personal expenses are generally not allowed, an itemized deduction may be available for casualty losses that are sustained with respect to personal use property during the taxable year, and are not compensated for by insurance or otherwise are deductible, subject to certain limitations.1 Casualty losses are losses that result from an identifiable event that is sudden, unexpected or unusual, and has destructive force.2 These can include fires, shipwrecks, automobile collisions, storms, hurricanes, floods, earthquakes or other similar destructive events.3
The amount of the casualty loss may not be the full amount of the economic decline suffered by the taxpayer, as it is limited to the lesser of the decrease in value of the property or the taxpayer's adjusted basis of the property.4 The adjusted basis generally is what the taxpayer paid for the property, increased or decreased, upon certain events. IRS Publication 551, Basis of Assets, explains how to figure the adjusted basis.
For example, if a taxpayer purchased an item for personal use for $500, which later rose in value to $1,000 and is completely destroyed in an uninsured casualty, the full economic loss of $1,000 is not deductible. Instead, the casualty loss is limited to the $500 adjusted basis. If, on the other hand, the item's value prior to the casualty had decreased to $250, the casualty loss would be limited to $250, the decline in value due to the casualty.
For personal use property, two additional limitations decrease the amount of the casualty loss deduction. The first $100 of loss per casualty event is not deductible ("per casualty floor").5 This per casualty floor applies once per casualty event, not per item. Second, the taxpayer's net casualty loss is only deductible to the extent it exceeds 10 percent of the taxpayer's adjusted gross income.6
This 10-percent-of-AGI threshold applies after the per casualty floor and to all casualty losses during the year. If the property is used in performing services, the casualty loss deduction is a miscellaneous itemized deduction and thus subject to a 2-percent-of-AGI threshold for miscellaneous itemized deductions.
A taxpayer claims a casualty loss for personal use property by using IRS Form 4684, Casualties and Thefts, to calculate casualty losses and gains for the year, and claims the net casualty loss as an itemized deduction on Schedule A, Itemized Deductions.
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