Understanding Disaster-Based Tax Credits and Deductions

We are now in the thick of the Atlantic hurricane season, something many of us in Texas have to be concerned about, particularly if we own property along the Gulf. Of course, summer also frequently brings severe thunderstorms to our state, complete with damaging hail, straight-line winds, tornadoes and devastating lightning strikes.

You may be wondering why a tax blog is discussing Texas’ weather patterns, but the reason for that is simple and something that many people are unaware of: the IRS has established certain deduction protocols and exemptions that are available to people who have suffered extensive property losses or incurred substantial expenses as a result of a natural disaster.

Insurance reimbursement versus tax exemptions

The IRS protocols regarding disaster taxes are designed for those people who don’t have insurance coverage to take care of substantial losses. According to the IRS tax tip regarding these, deductions are available only if the loss is major and not covered by insurance or other reimbursement.

Some other important facts to remember about casualty loss deductions:

• The full amount of loss isn’t usually deductible, but is instead subject to certain exemptions. For example, the loss must be linked to a casualty (defined by the IRS as a sudden, unexpected or unusual event); these include fires, storm damage, tornadoes, hurricanes, floods, earthquakes, accidents, theft or vandalism. There must also not be insurance coverage available for payment or reimbursement for the damages. Any deductible amount sought should be reduced by the amount of insurance coverage.
• Losses must be taken in the year in which they were incurred, or in the next fiscal year’s tax return. For losses that occurred in the calendar year 2017, they can be taken in the customer’s 2016 return or as part of the 2017 return.
• Loss totals must be determined by figuring out the item’s cost basis, determining the loss in fair market value as a result of the damage/casualty, and then subtracting the amount of insurance coverage or reimbursement from the smaller of those two amounts.
• Business losses are treated differently than those for property only used for personal purposes. A tax attorney familiar with the tax code can advise you about the viability and legality of business casualty deductions.