Recovery efforts after natural disasters can be costly. The good news is that there is taxpayer relief, but only if you meet certain conditions.
We’ll take a look:
Tax relief for homeowners
Personal injury losses are deductible on your tax return as long as the property is located in a presidential declared disaster area, and as long as:
- The loss was caused by a sudden, unexplained or unusual event. Natural disasters such as floods, hurricanes, tornadoes and forest fires are eligible.
- The damage was not covered by insurance. You can only claim a deduction for bodily injury not covered or reimbursed by your insurance. The catch is, if you submit a claim to your insurance company at the end of the year, your claim might still be pending at tax time. If this happens, you can file an extension on your taxes. Your tax professional can advise you on losses you can claim and help you apply for an extension.
- Your losses were sufficient to overcome any reductions required by the IRS. This agency requires several “discounts” for claiming losses on your tax forms. The first is that you must subtract $ 100 from the total amount of the loss for each loss. This is called the $ 100 loss limit.
Second, you need to reduce the amount by 10% of your Adjusted Gross Income (AGI) or Adjusted Gross Income from the total losses for the year. For example, if your AGI is $ 25,000 and your insurance company paid all of the losses you suffered due to the flooding except $ 3,100, you would first need to subtract $ 100, then reduce that amount by $ 2,500. The amount you could claim as a loss would be $ 500.
- Taxpayers who report the catastrophic loss on a previous year’s return should write the disaster designation in red ink at the top of the form. This alerts the IRS to expedite the processing of refunds, waive customary fees, and expedite requests for copies of previously filed tax returns for affected taxpayers who need them to claim benefits or to file amended returns claiming losses in damage.
Claim disaster casualty losses
Taxpayers affected in a presidential disaster zone have the option of claiming disaster-related losses on their federal tax return for this year or last year. Claiming the loss on an original (2021) or amended last year (2020) return will allow the taxpayer to get a refund sooner, but waiting to claim the loss on this year’s return could result in savings. higher tax, depending on other income factors. If you choose to deduct losses on your 2020 tax return, you have one year from the due date of the tax return to file.
This column is for informational purposes only and should not be taken as advice. Taxes are almost always complex and mistakes can be costly. Consider consulting a tax expert.
Norm Grill, CPA, ([email protected]) is the Managing Partner of Grill & Partners, LLC (GRILL1.com), chartered accountants and consultants to private companies and high net worth individuals, with offices in Fairfield and Darien, 203-254-3880.