When you find yourself in the middle of a crisis, the last thing you are thinking about is your tax situation. However, if you have been impacted by a sudden, unexpected disaster, tax consequences should be on your radar. When you suffer damage or a total loss of your home or personal property from an event that is attributable to a federally declared disaster, you may be able to reduce your taxes in the year the event occurred.
The tax deduction due to a casualty loss, attributable to a federally declared disaster, is claimed as an itemized deduction on Schedule A of your tax return. The loss is calculated based on the lesser of your adjusted basis in the property or the decrease in the fair market value of the property as a result of the casualty. You must reduce the amount of the loss by any insurance or other reimbursement received for the loss. Once the total loss is calculated, there is a $100 reduction to the loss and a second reduction equal to 10 percent of your adjusted gross income in the year of the loss. Contact your Yeo & Yeo tax professional for help with tax planning and assessing if there is a potential for tax savings due to the loss.
If you believe you have incurred a substantial loss and plan to claim the loss on your tax return, you will need to support your claim with documentation. That information will be easier to gather as you assess damages and document the loss in the present-day rather than next year as you pull together all your tax documents. The documentation required to substantiate your loss is similar to the items needed to make an insurance claim. Some examples are photos with a time and date stamp, an itemized list of the items lost along with their purchase price and current value, and paid invoices from contractors or restoration companies.
Being aware of the tax impact and thinking proactively could save you tax dollars and reduce the amount of loss incurred. Planning now could prevent another disaster during tax time.