Claiming Disaster Losses

If you are a victim of a disaster, the last thing on your mind is taxes. But tax obligations don’t disappear. Fortunately, you may be entitled to tax relief if you suffered property loss or destruction due to Hurricane Irene, the August East Coast earthquake, fires in Texas, and other disasters occurring this year.

Check for filing extensions

You may have more time to file an income tax return or a petition in Tax Court, or do other tax actions if you are a victim of a disaster. The IRS has the authority to extend filing deadlines, as well as to abate penalties for actions they cannot extend.

Check the IRS Disaster Assistance and Emergency Relief for Individuals and Businesses at www.irs.gov/businesses/small/article/0,,id=156138,00.html so find the latest guidance and information about tax relief for victims of various disasters.

Claim a disaster loss deduction

If you are a victim of a disaster in an area declared eligible for federal disaster relief, losses that are not covered by insurance or other reimbursements are viewed as a disaster loss. (You can find the list of federal disaster areas from FEMA at www.fema.gov/news/disasters.fema.) This means you can choose to deduct them on the return for the year in which the loss occurred or in the prior year.

Taxpayers who are on a filing extension for their 2010 return and experienced a disaster loss in 2011 should consider whether to claim the loss on their 2010 return. This may result in a tax refund, which can be used to help rebuild following the disaster.

Taxpayers who already filed their 2010 returns can file amended returns to claim the disaster loss. Those who cannot decide have until April 17, 2012, to decide whether to file an amended 2010 return. After this date, the 2011 loss can only be claimed on a 2011 return.

In claiming disaster losses, here are some important points to note:

• You can deduct only the actual amount of the loss. This does not include any sentimental value, which could be priceless to you. For example, if your family photos are destroyed by water damage, they are very valuable to you but the tax loss is nominal.
• The opportunity to deduct disaster losses as an additional standard deduction amount applied only for 2010; this does not apply to 2011 losses even though they may be claimed on 2010 returns.
• Usually, a disaster loss deduction is limited to damage resulting from a sudden event. However, if you are forced to relocate or demolish your home in a disaster area, you can treat the loss as resulting from the disaster.
• As with any casualty loss, a disaster loss must be reduced by $100 per event and only amounts totaling more than 10% of adjusted gross income can be claimed as an itemized deduction.

Disaster relief

Any payments received from a government agency or charity to cover personal living expenses resulted from a federal disaster are tax free. Grants made under the Disaster Relief Act to pay for housing, transportation, medical expenses, personal property, and funeral expenses are also tax free. However, if a grant reimburses a casualty loss, no deduction can be taken for the loss to the extent of the reimbursement.

Any cancellation of part of a federal disaster loan under the Robert T. Stafford Disaster Relief and Emergency Assistance Act is also treated as a reimbursement of a casualty loss and no deduction can be taken to the extent of this reimbursement.

Reimbursements from any source to help with repairs and rehabilitation of a personal residence and its contents lost in a federal disaster area are tax free. Again, no disaster loss deduction can be taken to the extent of this reimbursement.