01/02/2025
The Federal Disaster Tax Relief Act of 2023 was signed into law by the president Thursday December 12, 2024. Significant changes include being able to deduct on your federal income tax return unreimbursed casualty losses that are the result of a federally declared disaster to the extent that they exceed $500, by adding unreimbursed losses directly to your standard deduction. What this means is that MANY people with unreimbursed losses can now get an extra federal income tax deduction.
Please watch the video at this link https://youtu.be/x4RShVGJjuA and read the following for details to see if you might qualify and if so how to start gathering the needed information to include on your income tax returns.
Most people could not claim personal casualty losses on an income tax return however because 2024 Hurricanes Debby, Helene and Milton are now “qualifying federally declared disasters”, taxpayers affected will likely be able to deduct associated losses. This new legislation retroactively also covers Hurricanes Ian, Idalia, Nicole, Fred & Elsa for most Florida locations.
Regarding Hurricanes losses consider:
The loss must be a direct result of the qualifying federally declared disaster.
Claiming a casualty might not benefit a taxpayer already at zero tax.
You don't need to have spent money on repairs to have experienced a loss.
What type of stuff might count toward a schedule A casualty loss: House, boat, car, lanai cage, shed, mailbox, landscaping, fencing, pool, furniture, appliances, clothing, technology, media, window treatments, bedding, toys, sporting equipment, books, tools, housewares, condo, almost anything that caused your personal (not income producing) property to be worth less after the casualty than it was before the hurricane.
A loss is reduced by reimbursements (like FEMA, charity and insurance claim payments that have been or will be received by the taxpayer). Some payments like temporary housing may not be classified as reimbursement for loss and do not reduce the net casualty loss.
Most folks with reimbursed personal casualty losses will be able to deduct those losses to the extent they exceed $500. This $500 amount is applied individually to each separate casualty, even if claimed on the same year tax return.
It is recommended that a fair market value appraisal is obtained for any losses of real property (like your house) exceeding $20,000.
If losses of personal items exceed $5,000 please use the IRS publication 584 workbook to help figure your specific losses.
To elect to file a 2024 loss on a 2023 return most people will be able to amend their 2023 income tax return between now and October 15, 2025. There might be time to wait and see what some future insurance reimbursements actually happen.
If considering amending your 2023 income tax return and the dust has not yet settled on your insurance claim you may want to wait BUT even if not settled with insurance lets look at where you are no later than July of 2025.
If a taxpayer deducted a loss then in a subsequent year receives reimbursement for that loss then the taxpayer does not recompute the tax for the taxable year in which the deduction was taken but instead includes reimbursement in gross income for the taxable year reimbursement was received. Therefore it is normally most prudent to wait until all related claims are completely settled.
If you are already fully settled with insurance it MIGHT be most efficient to claim the loss on your 2024 original income tax return filing.
The following are methods you can use in determining your losses:
The first method is done by a competent appraisal. The appraisal must recognize the effects of any general market decline affecting undamaged, as well as damaged property which may occur simultaneously with the casualty, so that any deduction under the section shall be applied to the actual loss resulting from the damage to the property. For this method hire a professional property appraiser.
The second method is by cost of repairs that you actually make. The cost of repairing damaged property isn't part of the casualty loss, neither is the cost of cleaning up after the casualty, but you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in the fair market value, if you meet the following conditions; the repairs must actually be made, the repairs must be necessary to bring the property back to its condition before the casualty, the amount spent for repairs is not excessive and the repairs take care of the damage only, and the value of the property after repairs isn’t due to the repairs more than the value of the property before the casualty.
Other methods of determining the decrease in fair market value. They are safe harbor provisions as discussed in Revenue Procedure 2018-08. They are the estimated repair cost method, which requires that you use the lesser of two repair estimates. The estimates must detail the itemized cost to restore your property to its condition immediately before the casualty, the limit of the casualty losses of $20,000 or less, and it is for personal use, residential real property only.
And there is also the de minimis method, which requires a written, good faith effort of cost repairs required to restore your property to its condition immediately before the casualty and this is available for casualty losses of $5,000 or less, and it is also for personal use, residential real property only.
Then there is the insurance method. It is based on the estimated loss in reports prepared by your homeowners or flood insurance company. These reports must set forth the estimated loss you sustained from the damage or destruction of your property; and again, this is for personal use residential real property only.
Then there is the contractor safe harbor. This uses the contract price for the repairs specified in a contract prepared by an independent and licensed contractor to determine the decrease in fair market value. It requires a binding contract signed by the taxpayer and the contractor setting forth the itemized cost to restore the property. And again, just like the other ones, it is for personal use residential real property only.
Then there is the disaster loan appraisal method (i.e. SBA disaster loan application). It requires an appraisal prepared to obtain a loan for federal funds or a loan guarantee from the federal government that identifies your estimated loss. And it's also for personal use, residential real property only.
Then there is the de minimis method for personal belongings. It uses a good faith estimate to decrease in the fair market value of your personal belongings and this is limited to losses of $5,000 or less.
And finally, the replacement cost method. Again, it's for personal belongings. It uses the current replacement cost of the property reduced by 10% for each year you have owned the property.
These safe harbor valuation methods can be used instead of having a competent appraisal or using the cost of repairs. And again, that is Revenue Procedure 2018-08. So, if you're interested in using any one of these provisions, look at Revenue Procedure 2018-08.
I have a worksheet available which can be used to help you start documenting a casualty loss.
Additional information on videos at:
https://www.youtube.com/playlist?list=PLL9fyMzREDs1-clN09IRHHxlH47y6ydDC
Other useful reading:
https://www.irs.gov/newsroom/reconstructing-records-after-a-natural-disaster-or-casualty-loss https://www.irs.gov/instructions/i4684 https://www.irs.gov/taxtopics/tc515 https://www.irs.gov/publications/p584
https://www.irs.gov/forms-pubs/about-publication-547
Publication 547 explains how to treat casualties, thefts, and losses on deposits. It discusses definitions, how to figure gain or loss, how to treat reimbursements, and how to report them. This publication explains the tax treatment of casualties, thefts, and losses on deposits.
