Uncle Sam to the Rescue

Updated for Tax Year 2008


OVERVIEW

New rules make it easier than ever for taxpayers to get tax breaks on casualty loss deductions, following the devastating floods, hurricanes and fires in 2008.


The basics

First, a review of the basic rules, then a look at the changes that make this part of the tax law more valuable than ever.

The casualty loss deduction is the government’s way of helping taxpayers who have suffered financial losses due to accidents or storms. To qualify for a tax deduction, the loss must result from damage caused by an identifiable event that is sudden, unexpected or unusual. These include: earthquakes, lightning, hurricanes, tornadoes, floods, storms, volcanic eruptions, sonic booms, vandalism, riots, fires, car accidents and, oh yes, shipwrecks.

But what if you accidentally knock a vase off its pedestal and into a million pieces? The IRS says that’s not a casualty. How about when Rover romps through the house, knocking down the cabinet that holds your 50-inch high-definition television? Again, the IRS says there’s no tax deduction to help pay for the damage.

Pinpointing your loss

The amount of your loss is generally the decrease in fair market value of the property, or your adjusted basis in the property, whichever is less. The decrease in market value is the difference between what the property was worth before and after a casualty. The adjusted basis is usually your original cost plus the cost of any improvements you’ve made.

You may need appraisals to set the before-and-after values, although what you will have to pay for repairs—after an automobile accident, for example—can serve as evidence of your loss. If you are restoring landscaping after a storm, you can base your casualty loss on what you pay to remove or prune damaged trees and shrubs, and for the replanting necessary to restore your property to its pre-storm value.

Note that your loss doesn’t depend on the replacement value of the damaged property. Say that you bought a chair for $600 and that four years later it is destroyed by fire. At the time of the fire, you could have sold the used chair for $200, but to replace it with a comparable new chair would cost you $1,000. What’s your casualty loss? The decline in fair market value—$200—caused by the fire.

When your loss involves several separate items, as would be the case if your home was destroyed by fire or flood, you are expected to calculate the loss for each item rather than come up with an overall estimate. The IRS offers a free booklet, Publication 584: Nonbusiness Casualty, Disaster and Theft Loss Workbook, to help you inventory lost, damaged or stolen items and determine your deductible loss. (Even if you don’t suffer a loss, the booklet is a handy tool for keeping a household inventory.)

The role of insurance

The amount of your casualty loss deduction is reduced, of course, by any reimbursement you receive from insurance. If you have insurance, in fact, you must file a claim or forfeit your right to a tax deduction for the insured part of the loss. Before that rule was written into the law, some taxpayers chose to go for the tax write-off rather than file a claim and risk cancellation of their policy or an increase in premiums. That’s no longer an option.

If you can reasonably expect to be reimbursed for part or all of your loss—through insurance or a damage suit—you must trim your deduction by the amount you expect to get, even if you won’t get it until a future year. If you get less than you expect, the difference is considered a casualty loss in the year of the final settlement.

Gaining from losses

No matter how much you suffer from a casualty, the tax law might treat you as a winner. You have to report as taxable income any reimbursement that is more than your adjusted basis in the damaged property. Assume that you have a replacement value clause in your homeowner's insurance policy. After a fire, you determine that your basis in destroyed furniture and appliances is $10,000, but the replacement value paid by your insurance company is $15,000. Your taxable gain: $5,000.

There is an important exception to this rule. If you use all the insurance proceeds to buy replacement property—that is, items similar to or having a related use as the lost or damaged property—you don’t have to report any of the money as income.

The $100 and 10-percent rules

Once you have put a dollar value on your loss not covered by insurance—and reduced it by any amount of casualty gain—you don’t necessarily know the size of your casualty loss deduction.

The general rule demands that you reduce the casualty loss by $100 (like a deductible on an insurance policy) and by 10 percent of your Adjusted Gross Income. This double-whammy can really whack your tax deduction. If your Adjusted Gross Income is $100,000, for example, the first $10,100 of any casualty loss can’t be taken as a tax deduction.

But this is where new rules come in. If your 2008 loss was due to storms, tornadoes or flooding in the Midwest disaster area—basically including Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin—neither the $100 nor the 10 percent of AGI reductions apply. You may deduct your full unreimbursed loss.

If your loss occurred in any other presidentially-declared disaster area, the $100 reduction applies, but the rule about subtracting 10 percent of your AGI does not.

New break for non-itemizers

Another significant tax change went into effect after the 2008 storms. In the past, only taxpayers who itemized deductions could claim casualty loss deductions. However, starting in 2008 non-itemizers can add their qualified casualty losses to their standard deduction amounts. Because about two-thirds of all taxpayers claim the standard deduction, this change opens the door to tax help for millions of taxpayers. Both itemizers and non-itemizers fill in the necessary information on Form 4684 to claim the deduction.

Get every deduction you deserve

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

For only $59.99*
Start for Free

Looking for more information?

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

* Important Offer Details and Disclosures
  • TURBOTAX ONLINE/MOBILE

  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Absolute Zero $0 federal (forms 1040EZ/1040A) + $0 state limited time offer only available with TurboTax Free Edition; offer may change or end at any time without notice. Actual prices are determined at the time of print or e-file and are subject to change without notice. Savings and price comparisons based on anticipated price increase. Special discount offers may not be valid for mobile in-app purchases.
  • QuickBooks Self-Employed Offer with TurboTax Self-Employed and TurboTax Live for Extension Filers: To receive your complimentary subscription to QuickBooks Self-Employed through 10/31/19, you must pay for your 2017 TurboTax Self-Employed or TurboTax Live return between 4/18/18 and 10/15/18 and sign-in and access your QuickBooks Self-Employed account via mobile app or at https://selfemployed.intuit.com/turbotax at least twice by 12/31/18. You will have the option of renewing your QuickBooks Self-Employed subscription by 10/31/19 for another year at the then-current subscription rate. You may cancel your subscription at any time from within the QuickBooks Self-Employed billing section. See QuickBooks.com for price comparison. Offer not valid for existing QuickBooks Self-Employed subscribers already on a paid subscription.
  • Pays for itself (TurboTax Self-Employed): Estimates based on deductible business expenses calculated at the self-employment tax income rate (15.3%) for tax year 2017. Actual results will vary based on your tax situation.
  • Anytime, anywhere: Internet access required; standard data rates apply to download and use mobile app.
  • Fastest refund possible: Fastest tax refund with e-file and direct deposit; tax refund time frames will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice.
  • TurboTax Help and Support: Access to a TurboTax specialist is included with TurboTax Deluxe, Premier, Self-Employed and TurboTax Live; not included with Free Edition (but is available as an upgrade). TurboTax specialists are available to provide general customer help and support using the TurboTax product. SmartLook on-screen help is available on a PC, laptop or the TurboTax mobile app. Service, area of expertise, experience levels, wait times, hours of operation and availability vary, and are subject to restriction and change without notice.
  • Tax Advice, Expert Review and TurboTax Live: Access to tax advice and Expert Review (the ability to have a Tax Expert review and/or sign your tax return) is included with TurboTax Live or as an upgrade from another version, and available through October 15, 2018. These services are provided only by credentialed CPAs, EAs or tax attorneys. State tax advice is free. Some tax topics or situations may not be included as part of this service, which shall be determined in the tax expert’s sole discretion. In the event your return is reviewed by a tax expert and requires a significant level of tax advice or actual preparation, the tax expert may be required to sign your return as the preparer at which point they will assume primary responsibility for the preparation of your return. Expert Review [and TurboTax Live] not available on the TurboTax mobile app or when using a web browser on your mobile phone. On-screen help is available on a PC, laptop or the TurboTax mobile app. Service, area of expertise, experience levels, wait times, hours of operation and availability vary, and are subject to restriction and change without notice.
  • Tax Return Access and My Docs features: Included with TurboTax Deluxe, Premier, Self-Employed, TurboTax Live or with PLUS benefits. Access to all tax-related documents we have on file for you is available through 10/31/2019. Terms and conditions may vary and are subject to change without notice.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2016 TurboTax products.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.
  • CompleteCheck: Covered under the TurboTax accurate calculations and maximum refund guarantees.
  • #1 rated online tax prep provider: Based on independent comparison of the best online tax software by TopTenReviews.com March 13, 2017.
  • Get tips based on your tax and credit data to help get you to where you want to be: Tax and credit data accessed upon your consent.
  • TURBOTAX CD/DOWNLOAD SOFTWARE

  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal e-file of up to 5 federal tax returns. Additional fees apply for e-filing state returns. E-file fees do not apply to New York state returns. Savings and price comparison based on anticipated price increase. Prices subject to change without notice.
  • Fastest refund possible: Fastest tax refund with e-file and direct deposit; tax refund time frames will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice. This benefit is available with TurboTax Federal products except TurboTax Business.
  • About our TurboTax Product Experts: Customer service and product support vary by time of year.
  • About our credentialed tax experts: Live tax advice via phone is included with Premier and Home & Business; fees apply for Basic and Deluxe customers. State tax advice is free. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Not available for TurboTax Business customers.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2016 TurboTax products.
  • Data Import: Imports financial data from participating companies; may require a free Intuit online account. Quicken and QuickBooks import not available with TurboTax installed on a Mac. Imports from Quicken (2016 and higher) and QuickBooks Desktop (2012 and higher); both Windows only. Quicken import not available for TurboTax Business. Quicken products provided by Quicken Inc., Quicken import subject to change.