Following the arrival of hurricane Sandy last week, much of the east coast has had to deal, and in some cases is still dealing, with the clean-up, recuperation and recovery that too often comes after a natural disaster. With the storm, came power outages lasting for days in some areas, downed trees, flooding, etc. Some areas had little more than an extended morning commute, while others sustained significant losses of property. Did you know that those losses could affect even your tax returns?
Taxpayers who experience certain types of major personal casualties may be able to recoup some of their losses through tax savings. A casualty loss can result from the damage to or loss of property as a result of a sudden, unexpected event or natural disaster like an hurricane, earthquake, fire, tornado etc. So for those with property affected by flooding or wind damage from hurricane Sandy, claiming a casualty loss on 2012 taxes could help to relieve some of the inevitable financial hardship that comes along with repair or replacement of property. Additionally, since several states were federally declared disaster areas, taxpayers in those states can elect to take the loss in the year before it incurred. This means you might even be able to file an amended return for 2011 to get the potential tax refund sooner.
In order to claim a casualty loss, you must first prove the loss of property and support the deduction amount that you take on your taxes. According to the IRS, in order to prove casualty loss, you must be able to show all of the following:
- The type of casualty (car accident, fire, storm, etc.) and when it occurred
- That the loss was a direct result of the casualty
- That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage
- Whether a claim for reimbursement (typically from insurance) exists for which there is a reasonable expectation of recovery
To claim a casualty loss on your taxes, you must itemize the deduction on Form 1040, Schedule A. The taxpayer must also complete and attach a Form 4684, Casualties and Thefts, which contains descriptions of the property, cost basis, and fair market value before and after the casualty.
As with many aspects of financial law, figuring the casualty loss for tax purposes can be a detailed process. If you’ve sustained significant losses as a result of hurricane Sandy, consult your tax advisor to see if you are eligible to get some tax benefit to help offset your losses.