Not surpisingly, the IRS has announced that areas affected by Hurricane Sandy in Connecticut, New Jersey and New York will receive tax relief.
This generally means delayed filing and payment deadlines. However, people should also be aware that if they have suffered personal losses – a tax deduction is available for those losses from fires, storms, car accidents, and similar “sudden, unexpected, or unusual” events.
Figuring the loss:
The loss is measured as the lesser of
a) the drop in value, or
b) your cost in the property.
For example, if you bought a painting for $1,000 and prior to the hurricane it was worth $2,000,000 – you would only get to deduct $1,000 (cost of the painting is the lesser amount).
If you plan on taking advantage of this deduction it is important to develop evidence to establish losses. Estimates will not do.
Limits - Here are the limitations governing losses:
1) Only the monies not reimbursed by insurance are deductible
2) There is a statutory $100 limit per event. If your loss is $1,000 – you can only deduct $900.
3) 10% Floor – You can only deduct losses above 10% of your adjusted gross income. Thus if your AGI is $200,000 then you can only deduct your losses after they reach $20,000. The government sometimes waives this last rule if you are in a federally declared disaster area.
When to take the deduction.
Usually the deduction is allowed only in the year the loss is incurred. But if your loss is from a disaster in a federally declared disaster area, you can elect to take your loss in the year before it was incurred. This may increase the tax savings from the loss and may entitle you to a refund earlier than if you waited to file the loss year’s return.