The general principles and limitations on the casualty loss deduction for Sandy victims are as follows:
- The deduction can be claimed on the taxpayers’ 2012 tax return or the taxpayer can elect to amend and claim the tax benefit on their 2011 return if a greater benefit is derived.
- The loss is measured as the lesser of (a) the drop in value of your property and (b) your basis in the property (usually, your cost plus improvements [less depreciation for a business asset]). To the extent you are insured, you must reduce your loss by your insurance proceeds or any salvage value received. However, you shouldn’t fail to file an insurance claim in the hope of increasing your deduction. If you do, IRS will reduce your loss by the insurance reimbursement you could have received.
- The deduction for personal use property is an itemized deduction which must exceed 10% of a taxpayer’(s) adjusted gross income and a $100 casualty loss exclusion. This 10% of AGI limit on personal casualty losses has been waived in some prior federally declared disasters though I am aware of no similar announcement at this time related to Sandy.
- Non-itemizers generally can’t take a disaster loss deduction for personal use property, although non-itemizers were allowed an additional standard deduction for net losses from federally declared disasters occurring in 2008 or 2009.
- Casualty gains. Sometimes, a disaster may actually result in a gain for tax purposes. This may occur where the insurance proceeds you receive exceed your tax basis in the destroyed property. If that happens, there are several ways to exclude or postpone the tax on the gain. If you think you might be in a gain position, please let us know and we can review these options.
Other Important Information
- Document your loss: Create an Inventory of all damaged items, Take pictures and/or videos of all damaged or destroyed items. Any records of purchase included in your claim should try to be salvaged. If your claim will be based in part on the market value of your property before and after the disaster, appraisals may be required.
- Real estate taxes: If your home or other real estate was substantially damaged or destroyed by Hurricane Sandy contact your local tax assessor to inspect your property. You may be entitled to a reduced 2013 tax assessment and property taxes as a result of the damage to your property. Contact your assessor as soon as possible but no later than December 31, 2012.
- IRS Relief: The IRS recently announced that taxpayers affected by Hurricane Sandy in New Jersey, New York and Connecticut, will receive certain tax disaster relief. The tax relief postpones various tax filing and payment deadlines that occurred starting in late October. As a result, affected individuals and businesses will have until Feb. 1, 2013 to file these returns and pay any taxes due. This includes the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively. It also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period. The IRS automatically provides this relief to any taxpayer located in the disaster area. Taxpayers located outside the disaster areas may qualify for this relief if their books and records or tax professional are located in the areas affected by Hurricane Sandy.
Important information on dealing with a disaster’s aftermath is available on line from the Federal Emergency Management Agency (FEMA) at www.fema.gov