From devastating tornadoes, to flooding, to an unexpected earthquake on the East Coast, it's been a big year for disasters. So far, hurricane season hasn't been as a huge a deal as one might expect (although my husband's grandmother's house was destroyed by Irene), but we still have a few months to go. If you have been affected by a disaster, the IRS allows you to deduct some of your losses.
If You Live in a Federal Disaster Area
One of the most important designations when it comes to getting help with a tax deduction is being in an area designated as a federal disaster area. When you live in an area that is has been offered the “federal disaster” designation, you can actually amend your previous year's tax return. So, if you were hit with a disaster this year, you can amend your 2010 tax return to reflect the loss — and get a refund this year. You will need to use IRS Form 4684 (Casualties and Thefts) in order to claim your deduction.
Of course, you don't have to amend your tax return if you don't want to; you can claim the loss on your 2011 taxes, to be filed in early 2012. Realize, though, that you can't claim your loss twice. Once you claim it on one tax return, you can't claim it on future tax returns. Keep that in mind.
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Deduction for Any Disaster Loss
You don't have to be in a federal disaster area to deduct your losses, though. You can still claim losses from the current year on your next tax return. You would still file Form 4684. Realize, though, that whether your home is in a federal disaster area or not, you can only claim losses that are not covered by your insurance. If you have disaster insurance, or if your homeowner's insurance covers the disaster, you can't deduct those losses. You can only deduct what your insurance company doesn't cover, and then your claim has to be more than 10% of your Adjusted Gross Income (AGI).
In order to figure a deduction for disaster loss on your home, you need to determine the adjusted basis. This is represented by the purchase price plus improvements, or by the reduction in fair market value after your loss. Your adjusted basis will be considered whichever of these is less. Once you have the adjusted basis, you subtract the amount of money your insurance company paid to help offset the loss. Then, you have to subtract $100. Finally, you determine whether the result is at least 10% of your AGI. If it is, you can take the difference between 10% of your AGI and what your figure to come up with your deduction.
As an example: Your home is damaged by a flood. You document that your cost basis is $20,000 less than the fair market reduction of $50,000 that your home received. You have flood insurance, and it covers $13,000 of your damage. You subtract the $10,000 from your insurance company from the $20,000 to arrive at $7,000. Next, you subtract $100, leaving $6,900. Next, you have to look at your AGI. If your AGI is $58,000, 10% would be $5,800. That's less than the $6,900, so you can subtract it from that number to figure your deduction, which is $1,100.
Before you take this deduction, it might be a good idea to consult with a tax professional or financial professional, and look at Publication 547 from the IRS.