With the 2021 individual income tax filing season now open, residents affected by last year’s severe storms and flooding should know they are eligible to save on taxes.
The IRS says that due to the catastrophic flooding this past June and the ensuing losses, as well as the subsequent presidential declaration of a disaster area, taxpayers are eligible to deduct the amount of their losses less any insurance and/or federal reimbursement on their 2021 tax returns.
The IRS says filers should be sure to ask their tax accountant about deducting the eligible “casualty loss”, or losses to home and property, caused by the flooding.
Alternatively, if self-filing tax returns, read the IRS “Topic No. 515 Casualty, Disaster and Theft Losses” on the IRS website.
A casualty loss can result from the damage, destruction or loss of property from any sudden, unexpected or unusual event such as a flood, hurricane, tornado, fire, earthquake or volcanic eruption. A casualty doesn’t include normal wear and tear or progressive deterioration.
Taxpayers can deduct casualty losses relating to their home, household items and vehicles on their federal income tax returns if the loss is caused by a federally declared disaster or a significant fire. They may not deduct casualty and theft losses covered by insurance, unless they file a timely claim for reimbursement and reduce the loss by the amount of any reimbursement or expected reimbursement.
Casualty losses are deductible in the year a filer has experienced the loss, which is generally in the year the casualty occurred.
There are three types of casualty losses: Federal casualty losses, disaster losses and qualified disaster losses.
All three types of losses are referred to as federally declared disasters, but the requirements for each loss varies. For more information, see IRS Publication 547, Publication 2194 PDF and Publication 976 or refer to the Instructions for Form 4684.
If a resident’s property is personal-use property or isn’t completely destroyed, the amount of casualty loss is the lesser of:
— The adjusted basis of the property, or
— The decrease in fair market value of the property as a result of the casualty.
If the property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of the loss is the adjusted basis.
Individuals may claim their casualty and theft losses as an itemized deduction on Form 1040, under “Itemized Deductions” or Form 1040-NR for nonresident aliens. For personal property, filers must subtract $100 from each casualty or theft event that occurred during the year after subtracting any insurance or other reimbursement. Then add up all those amounts and subtract 10 percent of their adjusted gross income from that total to calculate the allowable casualty and theft losses for the year.
Those who have a qualified disaster loss may elect to deduct the loss without itemizing their deductions.