Let's face it: 2012 wasn't a great year for homeowners—and we're not even talking about foreclosures.
There were wildfires, tornadoes, flooding, mudslides, more wildfires, more tornadoes and, oh, yeah, Hurricane Sandy.
Even if you have homeowner's insurance, it may not have covered all of the damage to your home if you fell victim to one of these disasters. You may even have lost your house, along with other possessions. If so, you should know that you can deduct the damage not covered by your insurance to reduce your tax bill.
However, as with most things in the tax code, it's not a super-simple process. Here's what you need to know if you're claiming a natural disaster loss.
What It Is
The official term for damage done to property is known as "casualty loss." The I.R.S. says that you can take this deduction if you suffered “the damage, destruction or loss of property from an identifiable event that is sudden, unexpected or unusual.” This includes car accidents, fires, floods, storms and hurricanes. (Plus some odd things, like sonic booms. Anyone live near an Air Force base?) Read I.R.S. Publication 547 to see if you qualify.
How It Works
This deduction isn't just for your home. It can also apply to the loss of a car, furniture, jewelry or anything else that you could have gotten money for had you sold it. You can even apply this to landscaping if you had to hire someone to remove downed trees and branches.
If insurance—renter's, homeowner's or automobile—reimbursed you partially for the loss, your casualty loss only applies to what the insurance company didn't cover. So if your loss was $21,000, and your insurance company gave you $10,000, then your casualty loss is $11,000. (This is why the deduction is especially useful for homeowners who realized too late that they weren't covered for flood insurance.) And if you're still waiting to find out what your insurance company will reimburse, ask for an automatic, six-month extension to file your taxes.
If you received payments from the Federal Emergency Management Agency (FEMA) for repairs or a replacement of your damaged or destroyed home, those must also be subtracted from the casualty loss. But other FEMA payments for food and temporary housing don't have to be deducted. So think of your casualty loss as what you'll have to pay out of pocket to get your home back to where it was before disaster struck.
You can only deduct your losses if they are worth more than 10% of your adjusted gross income, plus $100. So, for example, if your AGI is $75,000, you can only deduct your losses if they're worth more than $7,600. You also can only deduct your loss if you're itemizing.
How to Determine the Value of the Loss
This all begs the question: How do you figure out your loss in the first place?
You can only base your loss on what the property was worth right before the storm. Let's say your car was flooded, and it's now unrecoverable. If the Kelley Blue Book value of the make, model and year of the car is $10,000—meaning you could have sold it for $10,000 before the flooding—then that's what you base the car's value on, and not what you paid for it in the first place. The same goes for furniture and other property. Note: Sentimental value doesn't count—it's only what you'd get on the market for an item.
Alternatively, you can also base the loss on how much it takes to repair the property. Drywall replacement is a good example: Your loss is what it costs to replace all of the drywall in your flooded home, plus other necessary repairs. Just don't upgrade while you're at it—and then try to claim that expense as a loss.
Oh, and there is one hitch: You can't claim more than what you originally paid for the property, plus improvements. So if you bought your house for $300,000 in 1990, and then added an addition that cost you $75,000, you can't claim more than $375,000 in loss if your house was destroyed. And that's even if it had a market value of $500,000 in 2011. The I.R.S. wants you to start with the number that's smaller—either adjusted basis ($375,000, in this example) or fair market value.
How to Calculate What You Can Deduct
We just covered how to determine the value of your loss, but it's not the same as what you can deduct. To figure this out, multiply your AGI by 10%, and then subtract that figure and $100 from the amount of damage that's not reimbursed.
Let’s say your home sustained $20,000 in hurricane damage, but you were only reimbursed $10,000 by your insurance company:
$20,000-$10,000 = $10,000 in unreimbursed damage
Your AGI is $75,000, so $70,000 x 10% = $7,500
$10,000 – $7,600 = $2,400 in deductible damage
You'll make this calculation on Form 4684. From there, the amount is carried to Schedule A of Form 1040, where itemized deductions are listed.
However, after some previous devastating hurricanes, Congress removed the requirement that a casualty loss be reduced by 10% of your AGI, and there's a chance that they could do so again in light of Hurricane Sandy. So this is yet another reason to request an extension to see if that happens. In fact, the I.R.S. announced on February 1 that it is extending tax relief by postponing various penalties and payment deadlines that occurred starting in late October, such as fourth-quarter individual estimated taxes, which are normally due January 15. Those affected by the storm can get more details here.
Should You File an Amended Return?
If your income in 2012 was lower than it was in 2011, it might be a good idea to file an amended 2011 return, and claim your loss for that year. That's because you'll be charged less in taxes for 2012 because of your lower income, so you'd want to put your losses against your higher 2011 income.
If your loss is so large that the deduction is equal to or more than an entire year's income, you can file amendments going back three years or carry forward the loss for up to 20 years to reduce your taxable income in the future.
Photo credit: Flickr/Randy Le'Moine Photography