It's probably one of the worst things you could imagine -- a hurricane, tornado or earthquake occurs, without warning, and your home is severely damaged or absolutely destroyed.
One would hope that homeowners are covered in such instances, but we all know that not every insurance policy is created equal and some homeowners lose everything. Thanks to provisions at the IRS and Presidential-declaration of disaster areas, at least the homeowner is allowed tax relief for his or her losses.
The first place to go to after a natural disaster is to the Federal Emergency Management Agency's online listing of Federal Disaster Areas to see if your area has been declared as a disaster area. This announcement is what gets the ball rolling on whether you can declare deductions on your taxes from loss of uninsured property and for losses not covered by your homeowner's policy.
There have already been 26 Presidentially-declared disaster areas in 2007. These are locales where damage to property and life exceeded the normal damage from natural disasters.
While the devastating tornadoes that hit Kansas made the national news and made all of us aware of that massive damage, many other areas are declared disaster areas for such disasters as severe winter storms, landslides, mudslides and flooding. Nevertheless, just because an area is declared a disaster area, doesn't necessarily mean that the homeowners in that area will also receive tax relief. But it's the first place to start.
Once you see if your county has been listed, then visit the Internal Revenue Service's section on disaster relief. You'll see on this page that the latest declared relief areas include:
- May 2007 Kansas storm, tornado victims
- April 2007 Texas storm, flooding victims
- April 2007 Northeast storm, flooding victims
- March 2007 New Mexico storm, tornado victims
If you go to this area and find that your area was declared a disaster area a while back (several years) you can always amend a past tax return if you believe that you should have received that tax relief. Be sure to look on the site or call the IRS to find out if there are limitations on the relief.
Not all damage is deductible. The largest deduction appears to be for people who have losses and have carried no insurance whatsoever. The Q&A area answers most questions for homeowners, such as how the deduction for uninsured losses would be counted. For instance, the way an uninsured loss is handled is, "ordinarily, to figure a deduction for a casualty or theft loss of personal-use property, taxpayers must reduce the loss by $100 and also reduce the total of their casualty and theft losses by 10 percent of their adjusted gross income. Only the excess over these $100 and 10 percent limits is deductible."
As you're researching on IRS.gov what is deductible and what's not, you'll be looking for items such as Notices, Forms, Tax Topics and Publications. These are all linkable items on the web site and very useful in your research on what deductions that area allowed following such losses.
Finally, "affected taxpayers in a Presidentially-declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year," according to IRS.gov. "Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year's return could result in a greater tax saving, depending on other income factors.
Individuals may deduct personal property losses that are not covered by insurance or other reimbursements, but they must first subtract $100 for each casualty event and then subtract ten percent of their adjusted gross income from their total casualty losses for the year."
Here are some of the Publications listed on the IRS site that help taxpayers looking for tax relief because of a natural disaster:
- Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma: Provides information on tax law changes and relief provisions for victims of Hurricanes Katrina, Rita and Wilma. Download it (PDF 106.5K, 19 pages).
- Publication 547, Casualties, Disasters and Thefts: Provides details on how to figure and claim a disaster loss. Download it (PDF 132KB, 16 pages), or read Pub. 547 online.
- Publication 584, Casualty, Disaster, and Theft Loss Workbook. Read it online or download it (PDF 139KB, 24 pages).
- Publication 584B, Business Casualty, Disaster, and Theft Loss Workbook. Read it online or download it (PDF 68KB, 8 pages).
- Publication 2194, Disaster Losses Kit for Individuals (PDF 860KB, 100 pages). Attention: Publication 2194 is being updated with new provisions of the Katrina Emergency Tax Relief Act of 2005.
For information on these provisions, see News Release 2005-119, New Law Eases Loss Limitations for Katrina Victims.
- Publication 2194B, Disaster Losses Kit for Businesses (PDF 943KB, 78 pages): Contains various IRS publications and forms related to claiming disaster losses.
- Publication 3833, Disaster Relief: Providing Assistance through Charitable Organizations (PDF 507KB, 28 pages): Explains how the public can use charitable organizations to help victims of disasters, and how new organizations may obtain tax-exempt status.