Claim­ing A Loss Af­ter A Dis­as­ter Like Hur­ri­cane Har­vey

ForbesWeekly - - FRONT PAGE - BY KELLY PHILLIPS ERB, FORBES STAFF

Last week­end, Hur­ri­cane Har­vey (turned Trop­i­cal Storm Har­vey) made land­fall on the Texas coast. The im­pact was im­me­di­ate and dev­as­tat­ing. The storm dumped more than 24 inches of rain on Houston alone over a 24-hour pe­riod. Rain­fall to­tals reach more than 50 inches in Texas as the storm moved into Louisiana.

While the full eco­nomic im­pact to the area is still un­known, there are steps that res­i­dents who are af­fected can take to re­cover some of the losses. If you are seek­ing in­for­ma­tion on im­me­di­ate dis­as­ter relief or how to file a claim through the Na­tional Flood In­surance Pro­gram (NFIP), visit dis­as­teras­sis­tance.gov.

Tax­pay­ers who suf­fer eco­nomic loss due to a nat­u­ral dis­as­ter like a hur­ri­cane can claim a ca­su­alty loss de­duc­tion on their fed­eral in­come tax re­turn. A ca­su­alty loss is de­fined as the dam­age, de­struc­tion or loss of your prop­erty from any sud­den, un­ex­pected, or un­usual event. That in­cludes a hur­ri­cane, flood, tor­nado, fire, earthquake or even vol­canic erup­tion. A ca­su­alty loss does not in­clude nor­mal wear and tear or dam­age that hap­pens over time, like ter­mite dam­age.

To claim a ca­su­alty loss on your fed­eral in­come tax re­turn, you must item­ize your de­duc­tions us­ing Sched­ule A, Item­ized De­duc­tions. You’ll re­port the loss on line 20 of that form. You’ll find it just be­low the sec­tion where you’d re­port char­i­ta­ble gifts:

So what’s that num­ber? You’ll need to cal­cu­late the loss us­ing fed­eral form 4684, Ca­su­al­ties and Thefts. On Page 1, at Part A of that form, you’ll re­port any dam­age or loss of per­sonal-use prop­erty like your home or car. On Page 2, at Part B of that form, you’ll re­port any dam­age or loss of busi­ness or in­come-pro­duc­ing

prop­erty.

If your prop­erty is per­sonal-use prop­erty or is not com­pletely de­stroyed, the amount of your loss is the lesser of your ad­justed ba­sis or the de­crease in fair mar­ket value of your prop­erty be­cause of the dam­age. For this pur­pose, your ba­sis is typ­i­cally what you paid for the item plus any long-term im­prove­ments (like an ad­di­tion).

If your prop­erty is busi­ness or in­come-pro­duc­ing prop­erty, such as rental prop­erty, and is com­pletely de­stroyed, then the amount of your loss is your ad­justed ba­sis. For this pur­pose, your ba­sis is typ­i­cally what you paid for the item plus any long-term im­prove­ments less any de­pre­ci­a­tion that you might have pre­vi­ously claimed for your busi­ness prop­erty.

To the ex­tent that you could sal­vage your prop­erty or if you were re­im­bursed by in­surance, you must re­port those ad­just­ments. If you ex­pect to be re­im­bursed by in­surance but haven’t yet re­ceived any money, you have to re­port that, too. Don’t worry: you can al­ways amend your re­turn (or oth­er­wise re­port the ad­just­ment on next year’s re­turn) if it turns out that you re­ceived more or less than ex­pected.

Some prop­erty may not be cov­ered by in­surance. Un­for­tu­nately, ac­cord­ing to fig­ures from the NFIP, most homes af­fected by Har­vey are not cov­ered by flood in­surance. Just 15% of homes in Har­ris Coun­try, home to Houston, are cov­ered by flood in­surance; the num­ber tips to just 20% in neigh­bor­ing Nue­ces County.

For dam­age not cov­ered or re­im­bursed by any in­surance, sub­tract $100 for each event (mean­ing storm or dis­as­ter). Next, sub­tract 10% of your ad­justed gross in­come (AGI) from that amount to cal­cu­late your al­low­able loss.

Here’s a quick ex­am­ple: Your AGI is $50,000. You suf­fered dam­age to your home dur­ing Hur­ri­cane Har­vey and the value of your home de­creased by $15,000. You re­ceived $2,000 in in­surance money. Your ini­tial loss is $15,000 less $2,000 (in­surance), or $13,000.

That amount is re­duced to $12,900 ($13,000 less $100). Fi­nally, sub­tract $5,000 (10% of your AGI). Your ca­su­alty loss, for tax pur­poses, is $7,900.

If, af­ter you fig­ure your loss de­duc­tion, it’s more than your in­come, you may have a net op­er­at­ing loss. How­ever, you don’t have to own a busi­ness to claim a ca­su­alty loss. You can find out more about op­er­at­ing losses here.

As with most de­duc­tions, you’ll want to keep ex­cel­lent records. It’s a good idea to take pic­tures of the dam­age: hope­fully, you have some be­fore pic­tures to compare to the af­ter. Keep re­ceipts of re­pairs and re­place­ment val­ues. In some cases, you may need or want to ob­tain an ap­praisal.

Ca­su­alty losses are gen­er­ally de­ductible in the year the loss oc­curred. How­ever, if you have a ca­su­alty loss from a fed­er­ally de­clared dis­as­ter, you can choose to treat it as hav­ing oc­curred in the previous year.

For a list of fed­er­ally de­clared dis­as­ter ar­eas, check out the Fed­eral Emer­gency Man­age­ment Agency (FEMA)

web­site. As of to­day, a dis­as­ter due to Hur­ri­cane Har­vey had been de­clared in the fol­low­ing coun­ties: Aransas, Bee, Bra­zo­ria, Cal­houn, Cham­bers, Fort Bend, Galve­ston, Go­liad, Har­ris, Jackson, Kle­berg, Lib­erty, Matagorda, Nue­ces, Refu­gio, San Pa­tri­cio, Vic­to­ria, and Whar­ton.

Ad­di­tional tax relief may be avail­able, in­clud­ing ex­ten­sions of time to file and make pay­ments. The IRS has an­nounced ex­ten­sions for tax­pay­ers af­fected by Hur­ri­cane Har­vey—find out more here.

As ter­ri­ble as dis­as­ters are, they can also bring out the good in peo­ple. Re­mem­ber that your gifts to qual­i­fy­ing char­i­ta­ble or­ga­ni­za­tions are tax de­ductible (as­sum­ing you item­ize) in the year that you make the gift. Be gen­er­ous, be smart and get re­ceipts. You can find out more here.

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