If you live in a federally declared disaster area, claiming a casualty or disaster loss is certainly allowed. If you receive insurance proceeds, they are tax free, but reduce the loss amount. For losses not insured or not fully insured, you may be able to take a deduction.
Note: Beginning with 2018 returns, only losses from federally declared disasters are deductible. No longer deductible are personal property casualty losses from other events, such as theft, car accidents, and vandalism, among others.
This type of loss is for the headline-making events, like hurricanes, tornadoes and other kinds of natural disasters. Living in an officially declared federal disaster area may make you eligible for certain tax advantages. If the disaster is bad enough, you may receive federal assistance with housing and cost of living expenses. Payments received from the federal government are nontaxable income. These payments can be used for medical, dental, housing, transportation, personal property, or funeral expenses.
Any loss you suffer can be deducted for the current year or, if it’s for a prior year, you can amend that year’s return. You also get an automatic 60-day extension to file and pay taxes if you live or work in a federally declared disaster area.
Note: Unemployment assistance payments received while also receiving disaster relief are considered taxable income.
Disaster losses can be deducted even if you do not itemize, since they’re considered above-the-line deductions.
If the property that sustained a loss was insured, you must file a claim for insurance reimbursement before deducting the loss on your return. For unreimbursed losses of personal property, you can only deduct the amount of loss in excess of $100 for each incident, and then subtract 10% of your adjusted gross income from that amount to calculate your allowable casualty and theft losses for the year.
Use the Form 4684 on your Tax Office & Associates™ return to report disaster losses. Just call us today to get started—we look forward to hearing from you!
Also see Keeping Records for Home Tax Breaks