Tuesday, September 6, 2011

Did you Suffer a Casualty Loss?

When you suffer a sudden, unexpected loss, you may be eligible for a deduction that can reduce your current tax, or in some instances, your prior-year liability.

When your personal property is damaged or destroyed as the result of a storm, earthquake, fire, or other casualty, you might be eligible for an itemized deduction. The personal property can include your home, household items, vehicles, and boats. You may not deduct losses covered by insurance unless you file a timely claim and you must reduce the loss by any amount of reimbursement.

If the property is not completely destroyed, the amount of the loss is the lesser of the adjusted basis of the property or the decrease in fair market value of your property as a result of the casualty.

The loss must be reduced by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. You may determine the decrease in fair market value by appraisal, or if certain conditions are met, by the cost of repairing the property.

Individuals are required to claim their casualty losses as an itemized deduction on Form 1040, Schedule A. For property held by you for personal use, once you have subtracted any salvage value and any insurance or other reimbursement, you must subtract $100 from each casualty event that occured during the year. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty losses for the year.

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. If you loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty.
If you incur a casualty loss, contact your insurance company and tax advisor.

Chesapeake Accounting Group, PC 453-7611