Casualty Losses and Natural Disasters
When a disaster strikes and your loved ones are all safe and sound, your thoughts turn to what is left to pick up from the rubble. As we have seen an uptick in forest fires, hurricanes, tropical storms and other natural disasters, what are your remedies and a way forward?
First, always consult your insurance company for any benefit that you may have under existing policies. This is the best way to repair and replace what was lost in a disaster.
Second, look to any federal, state, or local support as a way to solve some immediate problems.
Third, if you still have a loss, there is a tax benefit you could be eligible for. In certain circumstances, claiming a Casualty Loss could ease the sting of your hardship.
To qualify, the Casualty Loss must be in a federally declared disaster area, as documented by www.fema.gov.
The loss must be quantified by using the lesser of two methods: 1) the adjusted cost basis of the asset immediately prior to the casualty OR 2) the decrease in the Fair Market Value (FMV) as a result of the casualty. Subtract any insurance or other reimbursement that has been received or is expected to be received. If you have losses of different types from the same event (home, personal property, car, etc.) they should be grouped together.
The loss is claimed in either the tax year of the event or the prior year, up to the due date of the current year’s return – e.g., for losses experienced in September 2022, you have until October 2023 to claim to loss on a timely filed tax return. The loss can also be added to an amended return.
The IRS has already announced a filing extension until February 15th, 2023 for individuals and households affected by Hurricane Ian that reside or have a business anywhere in the state of Florida. You may consider taking advantage of that in order to gather records, accurately compute your loss, and identify any applicable insurance reimbursements.
Please reach out to your Copeland Buhl contact if you think you may benefit from this tax provision.