Did you suffer from a flood, fire, burglary, or major accident this year? Unfortunately, these kinds of unforeseen events often amount to huge financial losses due to lost or damaged property. If you endured such an incident, you may be eligible to deduct casualty losses from your taxes this year.
What’s a Casualty Loss?
Tax officials define a casualty loss as the damage, destruction, or loss of property resulting from a specific event that was sudden, unexpected, or unusual. A casualty loss deduction is used to make up for any unrecoverable losses that resulted from such an event.
Here are some common examples of events that may qualify you for a casualty loss deduction:
- A car accident that was not your fault
- A hurricane or tornado that caused major flooding and water damage
- An earthquake or fire that destroyed your property
- An act of theft or vandalism that was perpetrated by someone else
This list is not exhaustive by any means, but it should give you a ballpark idea of whether or not you’re eligible for a casualty loss deduction.
How Much Can You Deduct as a Casualty Loss?
As usual, calculating your deduction is the trickier part.
First, you have to prove you are the rightful owner of the property lost. This job isn’t too difficult, provided you maintained all the relevant documentation and/or receipts.
Then, you have to determine the actual value of the loss. This will be determined by either the “tax basis” value (what you originally paid for it) or the “fair market” value. Fair market value applies to assets that change in value over time, like houses and vehicles. Instead of using the original price for these assets, the IRS will use whatever the fair market value was at the time the property damage occurred. When deciding between tax basis value and fair market value, the IRS will take the lesser of the two.
Also, we mentioned above that casualty loss deductions are meant to cover unrecoverable property losses. Therefore, you must subtract from your total loss any insurance reimbursements or lawsuit settlements you expect to receive.
Once you have a final number for your actual loss, you can start calculating your deductible loss. Pay attention, because this part involves some more math:
- First, subtract $100 per event from your actual loss amount.
- Now, take this number and subtract 10% of your adjusted gross income.
- The net result is the amount you can claim as your casualty loss deduction on your tax return.
Of course, if you’re uncertain about any of this—whether it’s your eligibility for a casualty loss deduction or your property’s fair market value—you can talk to the experts at Taxation Solutions, Inc. We’re here to help taxpayers like you in the Arlington area claim every deduction you’re entitled to. Give us a call to get started!