As most of us in the tri state area returning to “normalcy” two weeks after Hurricane Sandy wreaked havoc throughout the east coast, many of you may now be contemplating the personal financial impact of the storm. The information below from MoneyMattersNJ.com should help to answer some of your basic questions. We of course encourage you to call or e-mail the office to discuss your specific situation in greater depth.
Rules for Casualty Losses
Losses for your personal-use property (such as your personal residence, household appliances, furniture and cars), are potentially deductible because the storm was a natural disaster. This deduction is limited to taxpayers who itemize their deductions.
If you have filed a claim for reimbursement (from insurance or otherwise) for which there is a reasonable prospect of recovery, no portion of the loss is deductible until the claim is resolved.
Generally, the amount of your casualty loss is determined by the decrease in fair market value (FMV) of the property as a result of the casualty, limited to the taxpayer’s adjusted basis in the property.
Two limitations apply to casualty loss deductions for personal-use property. First, a casualty loss deduction is allowable only for the amount of the loss that exceeds $100 per casualty. Second, the net amount of all of a taxpayer’s casualty losses (in excess of casualty gains, if any) is allowable only for the amount of the losses that exceed 10% of your adjusted gross income (AGI) for the year.
When to Take the Deduction
Since these casualty losses resulted from a federally declared disaster, you can claim the loss this year or in 2011 (the year before the loss was incurred). We will evaluate this option for you, as taking the loss via the filing of an amended 2011 income tax return may increase your tax savings and/or you may get your refund earlier than waiting to file your 2012 income tax return next year.
Information needed to claim the loss
- Description of the property (or properties)
- Their cost basis
- The FMV before and after the casualty
For instance, let’s review your potential tax loss if your personal vehicle that you purchased for $30,000 was destroyed in the storm which had a fair market value of $10,000 after three years of use. If your insurance company reimburses you $4,000, then your casualty loss would be $6,000. This $6,000 loss would be grouped with all your other storm losses subject to the $100 limit and 10% of your AGI.
Not every casualty results in a loss for tax purposes, and in some cases, you may have a “casualty gain.” For instance, suppose you purchased your home for $100,000 (your tax basis) and it has increased in value to $300,000. If your home is destroyed and you receive close to $300,000 in insurance, you will have a gain of close to $200,000. In certain cases, tax on a casualty gain can be avoided or deferred if the insurance proceeds are reinvested in replacement property.
Casualty losses on business property are basically computed in the same manner as personal property, except that the $100 deduction and 10% limit of AGI does not apply. Please feel free to contact us for further information.
>>Click here for more Hurricane Sandy tax relief information including postponed tax deadlines for individuals and businesses in New Jersey or New York, Disaster Unemployment Assistance to New Jersey residents, Disaster Treatment of Payments to Sandy Victims and Managing the Tax and Insurance Aftermath of Sandy.