How to Claim a Casualty Loss from a Natural Disaster

Natural disasters can cause significant financial and emotional strain. However, the tax code provides some relief through casualty loss deductions for damages incurred. Understanding how and when to claim these losses can help ease the burden. Let’s explore how to claim a casualty loss, including what to consider if you’ve received insurance reimbursements and how to determine the best year to claim your loss.

What is a Casualty Loss?

A casualty loss is the damage, destruction, or loss of property resulting from an unexpected or sudden event, such as a hurricane, flood, fire, or earthquake. To qualify for a deduction, the loss must not be due to normal wear and tear or negligence. As an Enrolled Agent with extensive experience helping clients navigate these situations, I recommend keeping detailed records of the damage and any related expenses.

How Much Can You Claim?

The amount you can claim is generally the lesser of:

1. The decrease in the fair market value (FMV) of the property due to the disaster, or

2. The adjusted basis of the property before the casualty. Adjusted basis includes any improvements previously made on your property.

To calculate your deductible loss:

• Subtract any insurance reimbursements or other recoveries from your total loss.

• Apply a $100 reduction per casualty event.

• Reduce the remaining amount by 10% of your adjusted gross income (AGI).

  
  

For example, if your adjusted basis in a damaged property was $20,000, the FMV decreased by $18,000, and your insurance covered $12,000, your deductible loss would be calculated as follows:

$18,000 (loss) - $12,000 (insurance) = $6,000$6,000 - $100 (per event) = $5,900$5,900 - (10% of AGI)

If your AGI is $50,000, you would reduce the loss by $5,000 (10% of $50,000), leaving you with a $900 deduction.

What If You’ve Been Reimbursed?

If you receive an insurance payment or other reimbursement, it must be subtracted from your total loss. Only the portion of the loss not covered by insurance is deductible. Additionally, you cannot claim a loss if you expect to be fully reimbursed. Be sure to report any reimbursements accurately to avoid complications with the IRS.

When to Claim the Loss?

The year you claim your casualty loss depends on when the disaster occurred and whether it was federally declared:

• For losses from federally declared disasters, you can choose to claim the loss in the year the disaster occurred or the prior tax year. This flexibility allows you to evaluate which year provides the greatest tax benefit.

  
  

• For other losses, you must claim the deduction in the year the disaster occurred.

Consider consulting with a tax professional to analyze your specific situation and determine the most advantageous year to claim the loss.

Tips for Filing a Casualty Loss Claim

1. Document Everything: Take photos of the damage, keep receipts for repairs, and maintain records of communications with your insurance company.

   
   

2. Obtain a Property Appraisal: A qualified appraisal can help establish the pre- and post-disaster FMV of your property.

   
   

3. Complete IRS Form 4684: Use this form to calculate and report your casualty loss. Attach it to your tax return.

   
   

4. Stay Organized: If you’re claiming losses for a federally declared disaster, keep a copy of the declaration notice and any related correspondence.

Understanding how to claim a casualty loss can provide valuable financial relief after a natural disaster. By documenting your losses, staying informed about insurance reimbursements, and choosing the right year to claim the deduction, you can maximize your tax benefits. If you’ve experienced a casualty loss and need help filing your claim, contact us at info@mkhstaxgroup.com. We’re here to help you navigate the process and ensure you receive the relief you’re entitled to.