Tornadoes. Floods. Hurricanes. In addition to being devastating natural disasters, these events have another common denominator: the property damage they cause can be deducted from federal income taxes. If your home, vehicle, or household items and possessions are damaged or destroyed as the result of a qualifying event that the IRS considers "sudden, unexpected or unusual" – including natural disasters – you may be able to write a portion of the loss off your federal income tax.
Before you begin to imagine recouping the entire value of your loss, realize that there are limits. You will need to file an insurance claim (if you carry coverage) and your benefit payout will be factored in. If you have homeowner's or renter's insurance, and file a timely claim to be reimbursed for the loss, the amount that you are reimbursed by your insurance company will be subtracted from the amount you can deduct from your taxes, upon approval. If you do not have insurance – or choose to not file a claim – you can only deduct the loss that was not covered by your insurance policy. (For more, read Insurance Tips For Homeowners.)
If you have personal property that has sustained damage – or has been completely destroyed – by any of the following four categories of events, you may be able to deduct a portion of your loss from your federal income tax bill:
- Property damaged or destroyed by "act of God" which includes floods, fire, earthquakes, landslides, storms, tsunamis, volcanic eruptions and windstorms.
- The National Disaster Relief Act includes tax relief provisions for people affected by natural disasters between December 31, 2007 and January 2010. This may be extended to disasters occurring before January 1, 2011.
- Theft or vandalism, including burglaries, extortion, embezzlement, robbery and swindling.
- Accidents, riots, terrorist attacks
Unless your loss is due to a disaster and the president has declared your community a federal disaster area, you will need to deduct your loss the year that it occurred. If you live in a presidentially-declared disaster area, you can deduct the loss on your federal income tax return for the year prior to the event. (For more, see Five Insurance Policies Everyone Should Have.)
Figuring Out Your Potential Financial Write-Off
So if you've determined that your loss is covered under a "qualifying event" and you've filed a claim with your insurance company, you'll want to know how much, exactly, you could recoup by writing off your loss. To calculate that amount, you will first need to collect all related paperwork to substantiate and monetize property loss and/or repair cost.
To determine the value of your destroyed, damaged or stolen item(s):
- Figure out the original amount of the item/property.
- Estimate the value of the item now (after the event). The difference is the decrease in the items' fair market value (FMV).
- Choose the smaller amount of either (1) or (2) above.
- Subtract any insurance reimbursements you may have received from the number you came up with in #3.
If you've had several items stolen or damaged/destroyed as a result of a qualifying event, you will need to determine the loss on each item and then add those losses to come up with a total loss amount.
The number you come up with in (4) is the amount of your loss. Now that you've calculated the loss value, you can determine how much of that amount you can deduct from your taxes. If the casualty or theft affected personal use property (meaning not for business use) there are two limits to how much you can deduct:
- Subtract $500 for each item that was damaged, destroyed or stolen
- If your loss was due to theft or natural disaster in a non-presidentially declared area, you'll need to subtract an additional 10% based on your adjusted gross income (AGI).
Your AGI is your total income minus qualifying deductions (not itemized deductions i.e. mortgage interest, property taxes, charitable contributions, etc.). To calculate your AGI first add up your gross income which includes:
- capital gains
- taxable interest
- IRA and/or pension or annuity distributions
- unemployment compensation in excess of $2,400
- business income (or loss)
- farm income (or loss)
- rental real estate, royalties, partnerships, S corporations, trusts, etc.
- taxable Social Security benefits
- other income
Then subtract IRA contributions, student loan interest, tuition and fees deduction, educator expenses, health savings account deductions, half of self-employment tax and contributions to health insurance, penalty for early withdrawal from savings, and qualified retirement plans (i.e. IRA, SEP, SIMPLE, etc.), paid alimony and moving expenses. There are also qualifying deductions for educator expenses, domestic production activities, and for certain business expenses of reservists, performing artists, and fee-based government officials. The resulting number is your AGI.
In order to support your claim, you should locate, if possible, before and after photos of the lost/damaged/destroyed items, receipts, canceled checks, deeds, and, if necessary, professional appraisals. A professional appraisal can provide you with an accurate estimate of the value of your items and serve as evidence for your insurance claims, and the appraisal fee can be deducted from your taxes. (For more, check out Tax Tips For The Individual Investor.)
If you need assistance determining your potential write-off, consult with a tax preparation professional or use the IRS.gov website to get answers to questions. The IRS Publication 584 "Casualty, Disaster and Theft Loss Workbook" can help you determine your eligibility for deduction, and your state income tax department can provide guidance on federal and state guidelines. (For more, check out our Investopedia Special Feature: Insurance 101.)
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