Posted by Advanced Accounting & Tax Planning

This Is How You Claim a Casualty Loss after the Tax Reform

This Is How You Claim a Casualty Loss after the Tax Reform

An unexpected, unusual or sudden event that causes damage to your property would allow you to enjoy a casualty deduction -- in that tax year -- for the loss to your property. 

The following article is relevant to the filing of taxes for the tax year 2017 within the deadline of April 2018. Thanks to the passage of tax reform, you would also need to factor in some retroactive changes. Some elements of the tax reform would only impact you during the next tax year.

Property loss suffered from an unusual, unexpected or sudden event during a tax year allows a taxpayer to claim a casualty deduction in his return. For instance, a tornado or a hurricane could damage your property, or your car could be totaled in an accident due to no fault of yours. You can even claim the casualty deduction if a vandal damages your property.

Proof of casualty deduction

The IRS needs proof of rightful ownership of any property before it will allow casualty deduction for the loss of such property. The IRS also expects to receive notice of any anticipated receipt of reimbursements from insurance companies. You must also inform the IRS about any impending receipt of a monetary settlement resulting from a lawsuit. The number of such proceeds must be subtracted from your casualty loss deduction that would cover only losses that cannot be recovered.

Actual loss suffered

Before you make the casualty deduction, you must calculate the actual loss suffered by you. Consider the tax basis of your property, which is the amount you originally bought the property for. Compare this amount with the amount by which the fair market value has fallen, and take the lower figure as the amount you are allowed to deduct.

If you bought a new car in 2017 for $20,000, and an accident a year later -- when the fair value of the car is only $17,000 -- totals the car, you can only claim $17,000 as a casualty loss deduction, as the fair value is less than the purchase price. However, if you can get a salvage price of $2000 for the car, you can deduct only $15,000, after reducing the salvage value from the fair value. 

How much of the property loss is deductible?

To arrive at the deductible property loss, consider the following steps:

Step one: Calculate the actual loss, and subtract $100 from it. Such deduction of $100 is applicable in the case of each casualty event. (Note: do not deduct $100 from each property item.) For instance, if two hurricanes damaged the same property during a tax year, you would need to consider each hurricane as a separate event.

Step two: Compute your adjusted gross income (AGI). Calculate 10% of the AGI, and reduce the amount so calculated from the property loss after you have deducted $100 as described in step one, above.

After you affect the deductions in steps one and two above from your actual loss, you will be left with the deductible amount you can claim when you file your return.

How to report the casualty deduction?

Use IRS form 4684 to claim the casualty deduction. There is no need to itemize the deduction if the casualty loss resulting from a disaster that was federally declared as such. However, if it was not a federally declared disaster that damaged your property, you would need to itemize the deduction amount in schedule A of the return before claiming the loss. Ordinarily, itemized deductions are needed if the total of such deductions is more than the standard deduction allowed for your filing status.

Do Presidential Declared 2016 Disaster Areas Qualify for Special Treatment?

Many taxpayers have found it easier to claim casualty loss deductions after the new tax changes of December 2017 came into effect. After the change in tax laws, taxpayers no longer have to itemize the deduction but can instead amend the standard deduction allowed. To change the standard deduction allowed, taxpayers must first calculate the net casualty loss and subtract $500 from the figure. The amount that results from this subtraction can be added to the existing standard deduction to arrive at the new standard deduction allowed as per the tax law change. Apart from the above, special treatment is allowed by the law in the form of disaster distributions. Eligible retirement plans are allowed to:

  • Add the amount back to the retirement plan
  • Spread the amount to include as income over three tax years (optional)

A retirement plan administrator can best help you with the details relevant to such withdrawals.

While the described changes to tax laws are specific to 2016 Presidential Declared Disasters, you may see their impact on your tax returns in subsequent years.

Advanced Accounting & Tax Planning
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