February 9, 2009 12:00 am

Handling Disasters Impacting You and Your Home

Tornadoes, fires, floods, accidents, and other unexpected events can change your life in the blink of an eye. The impact on your personal and financial life can be devastating. While the personal aspects cannot be adequately addressed by tax solutions, there are significant tax breaks that can help to offset some of the financial losses that result from these terrible events. Here are some points to help you cope with disasters and steps to take to minimize the impact of future disasters.

Deducting Losses from Disasters

Midwest storms, tornadoes and floods, and Hurricane Ike in 2008 are some of the events that resulted in federally declared disaster areas, which are areas eligible for federal assistance through the Federal Emergency Management Agency (FEMA). If you suffered property damage in a federally declared disaster area, you may be able to deduct these disaster losses in excess of any insurance proceeds you receive. New tax rules effective for 2008 and 2009 can help to maximize your write-offs.

$100 floor. Casualty losses can be deducted only after subtracting a $100 floor. For 2009, the floor increases to $500. For those impacted by the Midwest disasters, the $100 floor does not apply.

Waiver of 10%-of-AGI limit. When deducting most casualty losses, such as a home fire that is not the result of a federal disaster, the deduction must exceed 10% of your adjusted gross income (AGI). This means that only very large uninsured losses actually can be deducted. However, for disaster losses in federally declared disaster areas, the 10% limit does not apply.

Nonitemized deduction. Casualty losses other than those resulting in federally declared disaster areas can be deducted only to the extent otherwise allowed as an itemized deduction; those claiming the standard deduction cannot write off their loss. However, starting for 2008 disaster losses, a taxpayer can opt to deduct the loss either as a subtraction from gross income (i.e., effectively as an additional standard deduction amount) or as an itemized deduction.

Prior year deduction. Those who experienced losses in federally declared disaster areas can opt to claim their deduction on a prior year return. This gives an immediate tax refund of the prior year’s taxes, money that can be used to help rebuild after the disaster.

Maintain Adequate Insurance

The best defense against financial losses from disasters is a good defense-having the right kind of insurance to protect your property in case of loss. Review the following types of coverage to make sure you have sufficient protection:

  • Homeowners insurance-to protect the home and its contents if you own your home.
  • Renters insurance-to protect the contents of the home if you lease your residence.
  • Flood insurance-to protect your home and its contents if you live within a flood zone. This is federal insurance (check with FEMA at www.fema.gov).

Note: Those in business may want additional coverage for business property, as well as business interruption insurance and other coverage.

Keeping Your Records Safe

To maximize your tax write-offs, it’s important to protect your tax records. (You are permitted to reconstruct tax records damaged by a disaster, but it may be impossible to remember all expenses and other information required to give you maximum write-offs.) Protecting tax records means keeping computer files, paper receipts, and other tax information safe from possible disaster. Consider:

  • Backing up computer records
  • Storing receipts and other paper files in a fireproof safe (insert papers in a ziplock bag to prevent against water damage in case of fire).

IRS Help

When disaster strikes, the IRS may waive certain tax deadlines to give affected individuals more time to file returns or complete other tax-related actions. The IRS may also provide special assistance. Be sure to check the IRS web site at www.irs.gov for details.

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Tax Glossary

Real property

Land and the buildings on land. Buildings are depreciable.

More terms