In light of Hurricanes Harvey and Irma and their paths of destruction, many Americans have flooding and damage in the forefront of their minds. Here in Maryland, we only watched the tragedy from afar; however, with nearly two months of hurricane season still to come, we are not out of the woods just yet. Clearly, those affected and displaced by Harvey and Irma have a million other things to think about before they even consider the tax implications of the disasters they just experienced. However, there are some tax issues that are noteworthy in relation to natural disasters.

The types of damage resulting from Hurricanes Harvey and Irma would fall under the “Casualties and Thefts” section of the tax code. A natural disaster, such as a hurricane, meets the necessary qualifications for sustaining a loss because the event is “sudden, unexpected, and unusual”. Therefore, damage resulting from a hurricane could in fact be deductible. What is NOT deductible are damages resulting from “progressive deterioration”. These damages are the result of normal wear and tear – such as the structural integrity of your house being compromised because of termite damage.

Those affected by the past weeks’ storms who live in areas that have federally been declared as disaster areas have the unique ability to claim the damages sustained to their properties either as an amendment to their 2016 return or as part of their upcoming 2017 filing. Having the ability to file the losses as an amendment to their 2016 return enables flood victims the option to receive some of the much needed funding from the resulting tax refund to begin the restoration and rebuilding process.

All of the information so far is great, but how do you come up with the total amount of loss? First of all, you would have to figure what the adjusted basis of your home is – the amount you paid for the home plus all documented improvements before the loss or the decrease in the fair market value of the home after the loss was sustained. Deciding which figure to use is easy, you use the lesser of the 2 previously mentioned amounts. You would take that amount and subtract it from any money you received from the insurance company. For other personal property – cars, furniture, appliances, etc.—you must substantiate the fair market value of the items before AND after the damage and take that difference and subtract it from any money received from the insurance company. Take all of this information and report it on IRS Form 4684 “Casualties and Thefts”.

You still aren’t finished yet. Now you have to take the totals from above that you reported on Form 4684 and subtract $100 from it. Next, subtract 10% of your adjusted gross income. If your result is positive after all of the calculations have been completed, you have arrived at your deductible “Casualties and Theft” loss amount.

Hopefully, none of the readers of this blog will have to endure the hardships we have seen on the news these past few weeks. However, if you should go through such a terrible event, it is always good to know what your options are. Here at Wealth Builders CPAs, we have an experienced team who would love to lessen your burden by taking care of the tax implications for you. Give us a call and let us help you!

 

Erb, Kelly Phillips. “Claiming A Loss After A Disaster Like Hurricane Harvey.” Forbes, 29 Aug. 2017, www.forbes.com/sites/kellyphillipserb/2017/08/29/claiming-a -casualty-loss-after-a-disaster-like-hurricane-harvey/?ss=taxes#7012e5260f79. Accessed 5 Sept. 2017.

Stanger, Tobie. “Writing Off a Catastrophic Loss.” Consumer Reports, 1 Sept. 2017, www.consumerreports.org/taxes/writing-off-catastrophic -loss/. Accessed 5 Sept. 2017.

IRS.gov: Publication 225: Casualties, Thefts, and Condemnations

IRS.gov: Publication 547: Casualty, Theft and Loss