After you have suffered loss from a federally declared disaster, you can deduct some of those losses on your Internal Revenue Service (IRS) tax return. The IRS has detailed guidelines concerning the losses that are tax deductible and which ones are not.
Federally Declared Disasters
A federally declared disaster affects many people over a wide area. These disasters usually are hurricanes, wildfires, floods, blizzards, or earthquakes. The Federal Emergency Management Agency (FEMA) has a website that lists all federally declared disasters. Losses from disasters that are not federally declared disasters do not qualify as tax deductions.When you file capital losses on your tax forms, you can subtract it from your 2022 or 2023 taxes. Since you most likely already filed your 2022 taxes, you can amend your forms and resubmit. Unfortunately, you only have six months after the due date to refile, which is Oct. 15, 2023. For losses you had in 2023, you have until Oct.15, 2024, to file.
Other casualty or disaster losses (not federally declared) cannot be claimed as an itemized deduction, says HRBlock. This rule has been in effect since 2018 and will end in December 2025. You will use Form 4684 to report your losses.
Limitations of Declarations
As you add up your losses from federally declared disasters, the IRS has placed two limits on how much you can deduct. You must automatically subtract $100 from your losses and an additional 10 percent of your adjusted gross income. You can itemize losses above those amounts on Schedule A.When losses exceed the reimbursements, Investopedia says that you do not need to deduct 10 percent of your adjusted gross income. In that case, you also do not need to itemize—just report it on Form 4684.
Insurance Adjustments
You also cannot claim any money received from an insurance company as part of your losses. The money you expect to receive to help cover your losses must also be subtracted from the total loss amounts.Any repairs, rebuilding, or replacement of items performed without cost to the owner must subtract the value from your losses. These are called no-cost repairs. Also, any repairs given for a donation or a token cost must have the value of that work subtracted from the loss.
Involuntary Conversion Gains
When you have insurance coverage for disasters, it is possible to have taxable gains. The proceeds from the insurance company can be greater than the tax basis for the damaged property. When this happens, the accounting firm GRFCPA says, you will owe capital gains tax on the excessive amount. The gain is an involuntary conversion gain. It can happen anytime the proceeds are larger than the tax basis, which includes the property’s price plus improvements, minus the depreciation.There is one advantage you have when your principal residence is damaged. At tax time, you can use the tax exclusion to reduce the involuntary conversion gains. If you are single, the exclusion for your principal residence is $250,000, and married people filing jointly have an exemption of $500,000.
Safe Harbor Methods of Calculation
The IRS says it will not challenge claims of loss of the fair market value of personal residential property or personal belongings when you qualify and use the designated safe harbor methods they provide. These methods will make your calculations easier.
Determining the value of your personal belongings has to be done on a graduated scale. Every year you own the item, you must subtract 10 percent of its value. If you owned an item for two years—subtract 20 percent of its value; for six years, you subtract 60 percent of its value, etc. The value of any item nine years or older is 10 percent of its purchase price.
Withdrawals From Retirement Accounts
The Secure Act 2.0 legislation allows people in a federally declared disaster area to withdraw money from their retirement accounts. There are no withdrawal penalties, even when the owner is less than 59½. Kiplinger says the withdrawals must occur within 179 days after the federal government declared it a disaster area.IRA owners can withdraw up to $22,000 for each disaster. You will owe taxes on your withdrawals, but you will have three years to pay it. You can recover the taxes paid on these withdrawals by filing an amended return on Form 1040-X. 401(k) owners, when their plan permits disaster withdrawals, can withdraw the lesser amount of $100,000 or 100 percent of the money in the account. You can repay any withdrawals made from retirement accounts for federally declared disasters.
Claiming Business Losses
Losses sustained by a business are much easier to claim than are personal losses. Businesses do not need to subtract the $100 or 10 percent of your adjusted gross income when you have a business loss. Also, they can claim the losses without having to itemize.When a grant is received from a state program to reimburse a business for losses, you cannot exclude the money from income, says the IRS. You can delay reporting it as income when using the money to buy qualifying replacement property, but there is a limited time frame.
After federally declared disasters, you have a limited time to claim losses to your personal property or business. To ensure you receive all the reimbursement possible, talk to professional tax agents who understand the latest tax codes relating to disasters.
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