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The recent hurricane crisis in Florida has impacted several of us and devastated some families. As we try to cope with the fallout and regain footing, it is important to understand the tax implications of these losses. Hurricane Ian resulted in Florida being named a federally declared disaster area by President Biden. As such, if you have personal property losses in Florida you are eligible for casualty loss deductions. Be aware that your total personal property casualty loss must be more than 10% of your adjusted gross income (AGI) to be eligible for a deduction. These casualty losses are calculated subject to the following limitations:

Begin with the lower basis in the property or economic loss. For example, a vase purchased for $5000 (basis) with an appreciated value of $20,000 is fully damaged. You can only deduct the $5000 basis, not economic value, subject to the next three limits.

Losses are reduced by any reimbursed insurance amounts. For example, the same $5000 vase is fully destroyed but insurance paid you $3000, and you can only take the remaining $2000 as a loss.
The total casualty loss is subject to a minimum $100 reduction (one-time reduction for total disaster loss, not each item), for example for the above vase potential casualty loss must be reduced by $100. Thus $2,000 less $100 equals a total potential loss deduction of $1,900,

Finally, all disaster-related losses that occurred after January 26, 2021, are subject to the AGI limit of 10%. Thus, if your AGI is $75,000 your AGI floor is $7,500. Any amount above this is eligible for casualty loss deduction. Our vase example would not qualify.

Note there is an alternative calculation available for “Qualified disaster loss” (see page 2 of instructions for Form 4684 attached) however, the IRS has not updated the rules to include any disasters after January 26, 2021. Thus, Hurricane Ian does not currently qualify for the alternative calculation. If the IRS changes this rule in the upcoming years, potentially for 2022, then you could elect the alternative calculation. In addition to the instructions under form 4684, the IRS publishes a step-by-step guide that helps identify property damage and includes a workbook to record items from room to room. This Workbook, Publication 584, is attached here.

For considering your eligibility and the number of your casualty losses, a more detailed explanation of the calculation and rules continue below.

Eligibility
Due to tax law changes from the Tax Cuts and Jobs Act, personal casualty losses for tax years 2018 through 2025, must stem from a federally declared disaster. A federally declared disaster is specifically authorized by the president allowing federal disaster assistance to flow to affected areas. For example, President Joe Biden issued a federal emergency declaration for Florida, thus any losses due to this hurricane would qualify for casualty loss deductions. Note, you may elect to deduct these eligible losses in the disaster year they occurred or the tax year immediately preceding the disaster year (this election is made on Form 4684 Section D). This is important to consider when contemplating the overall tax implications of your losses. You will likely need to file an amended return if electing the preceding year.

How do we calculate losses?
Losses are usually reduced by three amounts. First, if you are insured, you must reduce your loss with your reimbursement. Please note if you fail to file an insurance claim to increase your deduction amount, the IRS can reduce your loss by the insurance reimbursement you could have received. Second, for each casualty, you must reduce your loss amount by $100. This amount is per event, not per item damaged, thus if Hurricane Ian knocked over a light pole and it damaged your house and car you only have to record the $100 reduction once even though you have at least two items to claim. Third, after combining all your losses, you must reduce the total amount by 10% of the adjusted gross income (AGI). This acts as a “floor” for eligible losses. For Example, if your AGI is $85,000, your losses must exceed $8,500. The losses would only be eligible if they exceed the $8,500 floor. Let’s walk through an example:

Hurricane Ian knocked over a (city-owned) light pole that damaged your car and house. The damage to the car was determined to be $15,000 (assume worth more and this cost to repair), and the house had minimal damage equaling $35,000 (totaling $50,000 in damages for the house and car). However, the insurance company for the car covered $5,000 in damages, and the house insurance covered $20,000 in damages. You now have $25,000 of eligible losses to claim but you must reduce by your required $100 minimum and then look at your AGI floor. We only have $24,900 of eligible losses to test. If our AGI is $85,000 our floor will be set at $8,5000 (10% of AGI). Thus, our true deductible loss will be $16,400 ($24,900-$8,500). Note the IRS workbook lays this out in column format for ease of use.

Other considerations:
As previously noted, casualty losses are not always the decline in economic value. Losses are determined as the lesser of the drop in value or your basis in the property (usually at your cost). For example: If you bought an antique vase for $500 it rose in value to $4,000. It was damaged in a hurricane that was a federally declared disaster, after which it was worth only $2,000. For tax purposes, the casualty loss is only $500, even though the economic loss was $2,000 ($4,000 − $2,000). The lesser cost ($500) and drop in value ($2,000) are used.

Casualty gains are also possible. If you buy a house for $100,000 and it increases in value over the years. If the house is destroyed and you receive $300,000 in insurance, there is a gain of $200,000 since your basis was only $100,000. In most cases, this gain can be deferred but the ability to obtain a casualty gain should be noted.

Documentation and good records (such as receipts) are best for recording casualty losses. However, if you do not have good records you may need to search for pictures of items prior to the hurricane (in your phone or anywhere you can use as proof) and obtain estimate costs via the internet. In addition, you should consider contacting your bank or credit card company to obtain prior receipts or statements. In some cases, an appraisal may be necessary.

Theft may be included in casualty losses, but long-term items (such as damaged due to termites) or normal wear and tear are not included.

If you have questions, please reach out to your Topel Forman contact.

If you have questions, please reach out to your Topel Forman contact.

 

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