IRS Casualty Loss-Special Disaster Provisions

OVERVIEW: Taxpayers who have sustained a casualty loss (which is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual) may deduct that loss from their federal income tax return. There are two limits to these deductions:

  1. The 2% Rule:  The casualty loss deduction for employee property, when added to job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040), must be reduced by 2% of the claimant’s adjusted gross income. Employee property is property used in performing services as an employee.
  2. The $100 Rule:  After determining casualty or theft loss on personal-use property, the claimant must reduce that loss by $100. This reduction applies to each total casualty or theft loss. It does not matter how many pieces of property are involved in an event. Only a single $100 reduction applies.

An expedited refund can be a relatively quick source of cash, does not need to be repaid, and does not need an Individual Assistance declaration.

TIMETABLE: Causality losses must be reported in the fiscal year in which the damages occurred and are reported with ones normal tax filings (April 15th); however special rules apply for losses in a federally declared disaster. In these cases one can amend returns for the tax year immediately preceding the tax year in which the disaster happened. Such a claim may result in a lower tax for that year, often producing or increasing a cash refund.

APPLICATION PROCESS: This depends on whether the property was business, income-producing, or personal-use property. For personal use property, use both of the following:

  • Form 4684
  • Schedule A (Form 1040), Itemized Deductions Note: Do not use Schedule A (Form 1040) if you are deducting a net disaster loss as part of your standard deduction.

For business and income-producing property use Form 4684 to report your gains and losses. You will also have to report the gains and losses on other forms.

FOR MORE INFORMATION: See IRS’s Publication 547. And here’s a PDF of the IRS workbook that explains how to calculate your losses.

TAGS: housing, funding, business, taxes, declared disaster