Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year), or the return for the prior year (2016).
Choosing to take the deduction in the preceding year may increase the tax savings from the loss and may enable a refund from IRS before filing the tax return for the year the loss occurred. The taxpayer can elect to claim the loss last year (on either an original return or an amended return), and can generally expect to receive the refund within a matter of weeks. This can help with cash flow to pay some of the repair costs.
Determining the most beneficial year in which to claim the loss requires a careful evaluation of the entire tax picture for both years, including filing status for individuals, amount of income and other deductions, and the applicable tax rates.
For business, income-producing and rental property, the loss is not always the decline in economic value suffered. It’s measured as the lesser of (a) the drop in fair market value from before the disaster to immediately it and (b) adjusted tax basis in the property (usually, cost plus improvements and closing costs less any accumulated depreciation).
For non-business or income-producing property (such as a home or furniture) the actual loss figure must be reduced by three amounts. In many cases, these reductions result in no deduction being available.
First, to the extent of insurance, the loss is reduced by the insurance reimbursement. If property is covered by insurance, a claim must be made or the IRS will reduce the loss by the insurance reimbursement that could have received.
Next, for each casualty, an individual reduces the loss amount by $100. Note that this reduction is per event, not per item damaged. Thus, if a storm knocks over a tree that damages a car and home, there are three property losses (tree, car, house) and only one reduction.
Third, after combining all the losses under the above guidelines, reduce them by 10% of adjusted gross income (AGI). Only the loss amount above this “floor” can be deducted. There have been times when Congress waived the 10% floor temporarily. They have not indicated if they will do so for Hurricanes Harvey and Irma.
For individuals, the higher the marginal tax rate, the more valuable the deduction is and the itemized deduction phase-out does not apply to casualty losses. For example, a $4,000 deduction saves $1,120 for a taxpayer in the 28% tax bracket, but is worth $1,320 to a taxpayer in the 33% bracket.
One of the often overlooked costs is replacing landscaping. Most landscaping is not covered by insurance and the cost to replace can be significant. Considering the impact of the landscaping, a valuable deduction may be available.
We can assist you with determining the most beneficial year to claim the deduction as well as many of the intricacies of these issues, including casualty gains and elections to defer income.
For more information on how any of these rules might benefit you or your business, please contact your tax advisor or Teri Kaye, Tax Partner & Partner in Charge of the Fort Lauderdale Office, at [email protected].