From tornadoes and floods to tsunami waves on the Pacific coastline and severe winter storms in the Northeast, the United States has witnessed a wide variety of damaging natural disasters in 2011. Although it will probably come as a small solace if you've been victimized, at least you may be able to claim some tax benefits for certain casualty losses.
Even better, if damaged personal property you own is in an area officially designated as a federal disaster area, you might receive an immediate tax refund without having to wait to file your 2011 return.
According to the relevant tax regulations, you can deduct a property loss resulting from an event that is "sudden, unexpected, or unusual." This definition not only covers natural disasters like the recent floods, but also damage resulting from auto accidents and other mishaps. These same rules also apply to thefts and vandalism of your personal property.
As a general rule, you can deduct the lesser of the property's basis (usually, its cost plus any improvements) and the fair market value of the property, reduced by any insurance proceeds you receive to compensate you for the loss. It is recommended that you have the value of the damage estimated by a professional appraiser. Then you must apply two tax law limits:
- Each casualty or theft loss incurred during the year is reduced by $100.
- The remaining amount (after subtracting $100 per event) is deductible only to the extent it exceeds 10 percent of your adjusted gross income.
Example: Let's say that your AGI for 2011 is $100,000. Earlier this year, storms caused $30,100 of damage to your home. The insurance company reimbursed you $10,000. In addition, a pickpocket stole $600 from you at the mall. Assuming you incur no other casualties or thefts this year, your deduction is based on $20,000 of home damage ($20,100 after insurance payment minus $100) plus a $500 theft ($600 minus $100) for a total of $20,500. After applying the 10 percent-of-AGI limit, you can deduct $10,500 ($20,500 minus $10,000).
Note that the two limits discussed only apply to personal property. There are no such restrictions on losses to business property.
In the normal situation, you're required to deduct casualty and theft losses in the year in which the event actually occurred. But there's a special rule for losses suffered in an area designated as a federal disaster area.
Tax election: You can choose to claim the casualty loss on the tax return for the year immediately preceding the year of the actual event. In other words, you can file an amended tax return for 2010 instead of waiting until next year to file your 2011 return. If you obtained a filing extension for the 2010 tax year, you can still claim the loss on the 2010 return you must file by October 17, 2011, unless you live in an area officially designated as a federal disaster area, in which case the deadline is October 31, 2011.
This election enables you to get your hands on the tax money much quicker. The IRS will send you a refund, if you're entitled to one, within weeks of receiving your amended return or your return with extension. The special election is available to both itemizers and non-itemizers. We can provide you with any assistance you may need.
What happens if you change your mind? For instance, you might determine that it's more advantageous to have a casualty loss offset your 2011 tax liability than your 2010 taxes. The tax law gives you 90 days to revoke the election by returning any refund or credit you have received. If the IRS hasn't sent you the money yet, you must return it within 30 days of receipt.
When a natural disaster occurs, it can have a devastating impact on your property and your life. However, there are some tax benefits you can take advantage of that will serve to at least cushion the blow. We recommend speaking with your tax advisor to determine the best course of action for your individual circumstances.
Contact us at 215.441.4600 if you have questions or would like to discuss how this topic may impact your business.