In addition to the tragedy of lost lives and injuries, Superstorm Sandy caused many billions of dollars in property damage. The sad truth: disasters occur every year in America. If you’re unlucky enough to suffer a disaster-related casualty, here’s what you need to know about the federal income tax implications.
Deductions for Personal Casualty Losses
Theoretically, our beloved Internal Revenue Code allows you to claim an itemized deduction — on Schedule A of your Form 1040 — for personal casualty losses to the extent they are not covered by insurance. Exactly what is a casualty loss? It’s when the fair market value of your property or asset is reduced or wiped out by a hurricane, flood, storm, fire, earthquake or volcanic eruption (not to mention sonic boom, theft or vandalism).
In reality, however, many disaster victims won’t qualify for any personal casualty loss write-offs because of the following two rules. First, you must reduce your loss by $100. Obviously, that’s no big deal. Then you must further reduce the loss by an amount equal to 10% of your adjusted gross income (AGI) for the year (AGI is the number at the bottom of page 1 of your Form 1040). That is a big deal. Say you incur a $20,000 personal casualty loss this year and have AGI of $100,000. Your write-off is a relatively puny $9,900 ($20,000 minus $100 minus $10,000). You get absolutely no tax break if your loss before the two required subtractions is $10,100 or less, and you have no chance at all if you don’t itemize.