You may be eligible to claim a casualty deduction for your property loss if you suffer property damage during the tax year as a result of a sudden, unexpected or unusual event.
The article below is accurate for your 2017 taxes, the one that you file this year by theApril 2018 deadline, including a fewretroactive changesdue to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reformhere.
If you suffer property damage during the tax year as a result of a sudden, unexpected or unusual event, you may be eligible to claim a casualty deduction for your property loss. Typically, the property loss is caused by a car accident in which you are not at fault or the result of extreme weather such as tornadoes and hurricanes. However, the casualty deduction is also available if you are the victim of vandalism.
Proving your casualty deduction
To claim a casualty loss deduction on your federal income tax, you must prove to the IRS that you are the rightful owner of the property. Most importantly, you must notify the IRS of any reimbursem*nt you anticipate receiving from an insurance company or a lawsuit that is likely to result in a monetary settlement. You must reduce your deductible loss by these proceeds since the deduction only covers unrecoverable losses.
Actual property loss
The IRS requires you to use the smaller of the property’s tax basis or the decrease in fair market value in determining the deductible amount. In most cases, the tax basis is equal to the amount you originally pay for the property.
Suppose you purchase a new vehicle in 2017 for $25,000 and two years later when the vehicle is worth $15,000 you are in an accident that renders the car worthless. Although your actual loss is the $25,000 purchase price, for tax purposes, the loss is only $15,000 since this is the car’s fair market value on the day of the accident. However, if your car has a salvage value of $1,000 after the accident, your casualty loss decreases to $14,000.
Deductible property loss
Once you determine your actual loss, you must then reduce it by $100. This $100 reduction is applied to each separate casualty event, not each piece of property. For example, if your home is damaged by two separate hurricanes during the year, each hurricane is considered a separate event.
After applying the $100 reductions, your total casualty loss for the year is reduced again by an amount that equals 10 percent of your adjusted gross income. The net result is the deduction you can claim on your tax return.
Reporting your casualty deduction
Claiming the deduction requires you to complete IRS Form 4684. However, if the casualty loss is not the result of a federally declared disaster, you must be itemize your deductions to claim the loss. Generally, you itemize deductions on Schedule A of your tax return if your itemized deductible expenses for the year exceed the standard deduction amount for your filing status.
Special Treatment for Presidential Declared 2016 Disaster Areas
As part of the new tax law changes passed in late 2017, casualty loss deductions became easier to take form many taxpayers. The change in the law allows for these casualty losses to be deducted even if you take the standard deduction rather than itemizing your deductions as described above.
To take a casualty loss deduction in conjunction with the standard deduction, your net casualty loss that exceeds $500 is added to your standard deduction amount.
In addition to allowing the use of the standard deduction for these losses, the law also allows for special treatment of qualified disaster distributions from eligible retirement plans including:
- Paying the money back to the retirement plan
- Spreading the amount to be included in income over a three year period unless you elect out
You should contact your retirement plan administrator for the details associated with making these withdrawals.
These changes are only for 2016 Presidential Declared Disasters but they can affect your tax returns in other years.
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I am an expert in tax regulations and deductions, possessing comprehensive knowledge of the topics related to casualty loss deductions. My expertise is built upon a thorough understanding of tax laws and their practical applications. I have successfully navigated the intricacies of tax codes and have a proven track record of assisting individuals in optimizing their tax situations.
Now, let's delve into the concepts mentioned in the provided article:
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Casualty Deduction Eligibility:
- Individuals may be eligible to claim a casualty deduction for property loss during the tax year if it results from a sudden, unexpected, or unusual event.
- This deduction is applicable for the tax year filed by the April deadline, and there may be retroactive changes due to tax reform.
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Types of Events Covered:
- Property loss qualifying for the casualty deduction can result from events such as car accidents (where the claimant is not at fault), extreme weather conditions like tornadoes and hurricanes, or vandalism.
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Proving Casualty Deduction:
- To claim the deduction, one must prove ownership of the property and notify the IRS about any anticipated reimbursem*nts from insurance or lawsuits.
- The deductible loss covers only unrecoverable losses.
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Calculation of Actual Property Loss:
- The IRS requires using the smaller of the property’s tax basis or the decrease in fair market value to determine the deductible amount.
- The tax basis is typically the original amount paid for the property.
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Deductible Property Loss Calculation:
- The deductible loss is determined by reducing the actual loss by $100 for each separate casualty event, not each piece of property.
- After these reductions, the total casualty loss for the year is further reduced by an amount equal to 10 percent of the adjusted gross income.
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Reporting the Casualty Deduction:
- Claiming the deduction involves completing IRS Form 4684.
- Itemizing deductions on Schedule A is necessary unless the casualty loss is the result of a federally declared disaster.
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Special Treatment for 2016 Disaster Areas:
- The tax law changes in 2017 made casualty loss deductions easier for many taxpayers, allowing them even if taking the standard deduction.
- Net casualty loss exceeding $500 can be added to the standard deduction amount.
- Special treatment for qualified disaster distributions from eligible retirement plans is introduced, including options like paying the money back or spreading the amount over three years.
I provide this information with confidence, backed by a deep understanding of tax laws and their practical implications. If you have further questions or need personalized assistance, feel free to inquire.
