Rules for disaster victims claiming casualty losses
Tax Facts Q&A: Do special conditions apply for deductions made by taxpayers within a federally-declared disaster area?
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Editor’s Note: Under the 2017 Tax Act, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.
Question: What special rules apply to taxpayers who suffer casualty losses within a federally-declared disaster area?
Answer: In recognition of the fact that taxpayers who sustain casualty losses as a result of disasters often have an immediate need for relief, the IRC contains provisions that accelerate the recognition of tax benefits to which disaster victims are entitled.
As such, disaster victims are entitled to claim casualty losses on their tax returns for the year before the disaster actually occurred. This treatment is elective, so the taxpayer may choose to claim the casualty loss in the manner otherwise prescribed by IRC Section 165.
Planning Point: An election to claim a deduction for the preceding year must be made by filing a return (including an amended return) or a claim for refund clearly showing that the election has been made. In general, the return or claim should specify the date or dates of the disaster which gave rise to the loss, and the city, town, county, and state in which the property was damaged or destroyed was located at the time of the disaster. The election is irrevocable 90 days after the date on which it’s made.
If the due date (including extensions) for filing the taxpayer’s prior year tax return has not expired, the taxpayer can claim the deduction when the taxpayer files that return. If the due date has passed, the taxpayer can file an amended return to reflect the casualty loss deduction on the prior year’s tax return.
The special treatment described in this question applies to taxpayers who have sustained a loss:
(1) Arising from a disaster in an area where the President of the United States determines that assistance is warranted by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (or a successor act);
(2) Occurring after December 31, 1971;
(3) That otherwise constitutes a loss allowable under IRC Section 165(a) and the regulations.
A taxpayer is entitled to claim a loss under these provisions if the taxpayer’s residence is located in a federally declared disaster area that has been declared unsafe for use as a residence because of the disaster, and the taxpayer is ordered to demolish or relocate the residence within 120 days after the area is declared to be a disaster area.
The $100 floor and adjusted gross income limitations do not apply in the case of certain hurricanes and other natural disasters if specifically exempted. For example, victims of Hurricanes Katrina, Rita and Wilma (storms that caused extensive damage in 2005) were exempt from these limitations.
William H. Byrnes and Robert Bloink are co-authors of Tax Facts. They can be reached at taxfactshelp@alm.com.
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