The Internal Revenue Service provides disaster assistance to individuals. On your Form 1040 tax return, the federal government specifically allows taxpayers to take a loss (or partial loss) for personal use property.
When can you take this loss?
You can take this loss for the tax year you experience this loss or you can also amend your return to include the loss on your preceding year if you paid taxes for that year. What does this mean? Well, if a hurricane caused extensive property damage on October 29, 2012 and you did not receive a reimbursement for this, you can take this loss on your 2011 1040X return, or 2012 1040 return. However, you must decide what year you will take this loss by the later of the following dates:
1) the due date (without extensions) for filing your income tax return for the tax year in which the disaster actually occurred or
2) the due date (with extensions) for filing the return for the preceding year.
Basically, if you believe taking the loss on your 2011 1040X return would provide more of a refund than your 2012 1040 return then you must make this decision by April 17, 2013 the latest. Also, if you decide to take the loss on the preceding year, and then change your mind, you have 90 days to make this decision. (Once you receive the refund, you have 30 days to return the refund.)
The loss will basically provide a refund for some or all of the taxes you paid the preceding year depending on the extent of the loss.
How is the disaster tax loss defined?
A casualty is the damage, destruction, or loss of property from an identifiable event. The loss is determined by the following:
1) take the smaller of your adjusted basis in the property (what you paid for the property plus any increases/decreases depending on certain events (ie – an increase would occur if you made valuable modifications) or your decrease in the fair market value of the property (fair market value can be determined by a reliable appraisal of your property before and after the disaster.)
2) from this amount, subtract any insurance or other reimbursement you receive or expect to receive.
What impact does the theft loss have on my tax return?
First, you must subtract $100 from your casualty loss resulting from the disaster event. Then, you must deduct 10% of your adjusted gross income from the casualty loss. Additionally, the casualty loss comes through as an itemized deduction on your return. Therefore, if you took the standard deduction and the loss is less than that amount, it will have zero impact on your return unless you have other itemized deductions that push it above the standard. However, if you have a significant loss, this can offset a fair portion of your income resulting in little or zero tax. Therefore, if you paid tax for that year, it is likely that a portion or all of it will be refunded.
Also, if your loss greatly exceeeds your income, you can potentially carryback part of this loss to prior tax years.
For more information, please contact TaxFirm.com at 732-244-4500 or review Publication 547.