Can I claim a tax deduction if my property is damaged by fire, flooding, or natural disaster?
For the years 2018–2025, you can claim a casualty loss deduction for federally declared disasters only. Man-made disasters are not eligible for the casualty loss deduction for the years 2018–2025.
The Robert T. Stafford Disaster Relief and Emergency Assistance Act gives the President the power to declare a federal disaster when there has been a major disaster. A major disaster is defined as a natural catastrophe that causes damage that is so severe that state and local governments would be unable to respond to it effectively. You can find major disaster declarations on the FEMA website.
The loss can still be eligible if it happens outside the boundaries of the federally declared disaster so long as the disaster is deemed to have been its direct cause. For example, if you suffer property damage from a tornado, but the federally declared disaster is only for the county that borders the county where you live, your loss may still qualify because it was caused by a federally declared disaster.
How do I claim a casualty loss deduction?
IRS Form 4684 is used to calculate a qualifying casualty loss deduction. You are required to itemize your deductions on Schedule A, however, to be able to claim a casualty loss deduction.
It is important to know that any loss that is fully covered by insurance is not eligible for this deduction on your tax return. If you have a qualifying casualty loss deduction, you can take that loss on the tax return for the year in which the loss was suffered, or you may take the loss in the previous year. In general, a Tax Pro is best equipped to help you determine which year would be most beneficial. Your adjusted gross income, filing status, other Schedule A deductions, and tax bracket can all impact which year would be most beneficial for claiming the casualty loss deduction. If you do not typically seek professional assistance with your income tax return, you may want to consider doing so in the event of a casualty loss deduction.
The IRS often reviews and may audit casualty loss deductions. Make sure that you gather and retain any documents that support your deduction. For example, be prepared to provide proof of the original costs of any items, how they were damaged, the fair market values at the time of the loss, and the costs of repairs or replacement.
What other kinds of tax relief may I be eligible for in case of fire, flooding, or natural disaster?
In addition to potentially qualifying for a casualty loss deduction, you may also be eligible for penalty abatements. Generally, if you owe on your individual income tax return and do not file the return timely, the IRS adds a late-filing penalty. Similarly, if you owe on your individual income tax return and do not make the payment timely, the IRS adds a late-payment penalty.
The IRS often provides tax relief provisions for taxpayers who are affected by major disasters. Generally, the tax relief allows certain taxpayers in affected areas to file their returns after the original due date without incurring late-filing penalties. Additionally, the IRS also usually allows taxpayers to pay the taxes due late, without incurring a late-payment penalty. The IRS publishes most disaster relief information on its website.
Even if the IRS has not specifically authorized tax relief for your specific disaster, you may still be able to obtain an abatement of tax penalties. Many types of tax penalties can be abated by using the First Time Abate penalty relief. If you are not eligible for the First Time Abate penalty relief, you may qualify for a reasonable cause penalty abatement. A Rocket Legal Pro™ can assist you with determining which type of penalty abatement you might qualify for and making that request with the IRS.
Some states offer tax relief or assistance that is distinct from or in addition to the tax relief or assistance that the federal government provides. You can find information about state tax relief or assistance on your state’s tax authority website.
How does receiving a payment from my insurance carrier impact the tax relief I can claim?
The insurance proceeds that you receive for a casualty loss have a direct impact on the calculation for the potential casualty loss deduction.
To calculate the casualty loss deduction, first start with the total loss from the casualty event. Next, subtract the insurance proceeds or other reimbursements from the amount of the total loss. Then, subtract $100 from that figure. Finally, subtract 10% of your adjusted gross income (AGI). The final amount of these calculations is the casualty loss deduction that you may be eligible to claim on your income taxes. The more you receive in insurance proceeds, the lower the casualty loss deduction.
Below is a casualty loss deduction example for a $50,000 loss with $40,000 covered by insurance and a $50,000 AGI.
- $50,000 (total loss) − $40,000 (insurance proceeds) = $10,000
- $10,000 − $100 = $9,900
- $9,900 − $5,000 (10% of $50,000 AGI) = $4,900 (casualty loss deduction)
In this example, the $4,900 remaining is your casualty loss deduction. Remember: You are required to itemize your deductions to be able to claim the casualty loss deduction.
Some disasters are classified as qualified disasters. The calculations for a qualified disaster are slightly different from the calculations for a casualty loss.
A Tax Pro can assist you with determining if your loss is a casualty loss or qualified disaster loss. If you have more questions about your options after disaster related property damage, reach out to a Rocket Legal Pro™ for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
