SANATOGA PA – Natural disasters hit Lower Pottsgrove (PA) Township pretty hard during 2011. Heavy rains turned Sanatoga Creek, Sprogel’s Run, and the Schuylkill River into raging torrents. Much of what was in the water’s path was flooded and damaged. Properties here weren’t the only ones hit, of course: hurricanes soaked other parts of the Atlantic coast, tornadoes wreaked havoc in Southern and Midwestern states, and wildfires hit Texas
Traffic cones warn drivers away from flooded North Sanatoga Road last September
If you were affected by a natural disaster last year, the Pennsylvania Institute of Certified Public Accountants thinks you should be aware of Internal Revenue Service rules on casualty losses, as well as other financial considerations.
What Qualifies for a Deduction?
Under IRS rules, you are allowed to deduct a casualty loss that is the result of a disaster, but related rules serve to significantly whittle down the amount you can deduct.
First, consider what is eligible for the deduction. A casualty loss is the damage, destruction, or loss of property resulting from an identifiable event that is unexpected, sudden, or unusual. Damages from natural disasters – hurricanes, floods, wildfires, and earthquakes, for examples – are casualty losses. Damage to your home or other property caused by something that is not unexpected, sudden, or unusual, such as accidental breakage of items under normal conditions, progressive deterioration occurring naturally over time or due to the failure to maintain the property, does not qualify as a casualty loss.
If you suffered a casualty loss to your home, household goods, or vehicle due to a disaster, you should be eligible to deduct the amount of that loss on your tax return, less required adjustments. (The same is true if you suffer a loss due to a theft.)
How Does the Deduction Work?
According to the IRS, “If your property is personal-use property, or is not completely destroyed, the amount of your casualty or theft loss is the lesser of: The adjusted basis of your property, or the decrease in the fair market value (FMV) as a result of the casualty or theft.”
To determine your adjusted basis, start with the basis of the property. Your basis in the property is usually how much it cost you. Increase or decrease the property’s basis to reflect any improvements made to the property or depreciation deductions you have taken for the property.
The decrease in the FMV used to determine the casualty loss is the difference between the FMV of the property immediately before the casualty and the FMV of the property immediately after the casualty. The FMV immediately after the casualty frequently is the salvage value of the property. From the lesser of the adjusted basis of the property or the difference in its FMV, subtract any insurance payment or other reimbursement (such as compensation for the loss from a government or employer relief program). This is your casualty loss.
For example, say flooding heavily damaged a finished basement during a recent hurricane. Several items were destroyed by water damage—a washer and dryer, hot water heater, furnace, some furnishing, the basement walls. The basis in these items—what originally was spent on them—amounts to $10,000. The fair market value of these items was $9,500 before the disaster and $500 after, making the decrease in the FMV $9,000. Because the decrease in the FMV of the items is less than the adjusted basis in them, you must use the decrease in the FMV in your loss calculation. Your insurance covers you for a maximum of $5,000 in damages, leaving you with a $4,000 casualty loss.
Final Steps in the Calculation of the Deduction
Before deducting personal property casualty loss on your tax return, there are some last steps you must take. First, you must subtract $100 from every casualty or theft loss you report each year. That lowers the example amount to $3,900.
More significant, you must subtract 10 percent of your adjusted gross income from the loss amount to arrive at your final deduction. If your adjusted gross income was, $30,000 last year, you would subtract $3,000—10 percent—from your loss amount to arrive at $900 as your allowable deduction. If your adjusted gross income in the example was $39,000 or higher, that 10 percent would wipe out your allowable deduction altogether.
Other Sources of Help
For those seeking additional relief, it’s important to be aware that organizations such as the Federal Emergency Management Agency (FEMA) often provide funds and services to those affected by disaster. The agency’s guide, “Help After a Disaster,” offers an overview of what’s available. In addition, “Disaster Recovery: A Guide to Financial Issues” – a joint project of the American Institute of CPAs, the American Red Cross, and the National Endowment for Financial Education – answers questions on how to minimize the consequences in the first days, weeks and months after a disaster.
Contact A Certified Public Accountant
If you have experienced casualty losses due to a disaster, or if you have questions on preparing for or dealing with any financial issue, consult a local CPA. He or she can provide advice to help address a range of financial concerns.
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