The tornados that have wreaked havoc through the South this month are ranking as some of the worst storms this region of the country has ever seen. The photos are hard to view, with homes & businesses completely destroyed. Many of these storms have hit in impoverished areas where residents may not even have insurance to help them get back on their feet. The American Red Cross and other agencies are doing what they can but it will likely not be enough. If you have been affected by these storms, or any other type of casualty loss, you are eligible to deduct the losses relating to your home, household items and vehicles. You may not deduct casualty losses covered by insurance unless you file a timely claim for reimbursement, and you must reduce the loss by the amount of any reimbursement. You also cannot deduct losses for which you received emergency aid assistance.
A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption – although we don’t have to worry about that here in North Carolina. You cannot deduct losses from normal wear and tear or progressive deterioration. The amount of the loss you can take for personal-use property is the adjusted basis of your property, or the decrease in fair market value of your property as a result of the loss. When determining the amount of your loss, you must reduce the total of all your casualty losses on personal-use property by 10% of your adjusted gross income, after first reducing each loss by $100. The 10% rule does not apply to a federally declared disaster area.
Rules regarding casualty losses are complex and can change so it is best to seek advice from your CPA or financial planner when preparing your tax return. You can also refer to IRS Publication 547. And remember to keep documentation of your losses and amounts spent. Some costs of documenting your loss, such as appraisals or photographs, may also be tax-deductible.