Disasters can take a variety of forms and can strike at any time, crippling you financially. Fortunately, you might be able to claim a deduction on your federal income taxes, but not a credit, for casualties. In addition, any loss you have is reduced by any reimbursement for the loss, such as insurance proceeds.
The Internal Revenue Service defines casualties as "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." Though it sounds expansive, the definition doesn't include regular wear and tear or damage over time. For example, if your pipes burst in the winter because water froze in them, that's a casualty. However, if your pipes have started leaking because of corrosion over a several decades, that's unfortunate, but not a casualty.
For investment property that isn't completely destroyed or personal property, the amount of your casualty equals the smaller of your adjusted basis for the property or the decrease in the fair market value of the property. For example, say your home is completely destroyed. If your basis for your home is $150,000 and the fair market value is now $170,000, your loss is $150,000. If it's a completely destroyed investment property, your loss equals your adjusted basis.
The amount of your loss doesn't equal the amount you get to deduct on your taxes. First, you have to subtract $100 from each casualty during the year. So, if you have a $150,000 casualty loss from a tornado, it drops to $149,900. Second, only the portion of your casualty losses that exceeds 10 percent of your adjusted gross income can actually be deducted. Continuing the example, suppose your AGI is $130,000. Your casualty loss gets reduced by $13,000, bringing your deduction down to $136,900.
You can only claim casualty losses if you itemize your deductions, which requires using Form 1040 and Schedule A. To figure your casualty loss deduction, complete Form 4684. Once you've figured how much you can deduct, it goes on line 20 of Schedule A. That amount, along with your other itemized deductions, goes on line 40 of your Form 1040 tax return, replacing your standard deduction. If you'd rather take the standard deduction, you can't deduct your casualty losses.
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