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With this crazy weather season of floods, hurricanes, wildfires and more, knowledge of the tax laws can help victims of federally declared disasters. This is in addition to the tax filing and payment extensions that the IRS regularly provides.
Personal Losses
Personal casualty losses can be deducted by itemizers to the extent the losses are attributable to federally declared disasters, such as hurricanes, earthquakes, wildfires, blizzards or flooding, that affect a wide area.
Individuals can deduct losses on Schedule A to the extent not reimbursed by insurance. Your loss here is equal to the smaller of the damaged property’s adjusted basis or decline in value, less any insurance proceeds you received or expect to receive.
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Use Form 4684 to figure your losses and transfer the amount to Schedule A, line 15. Only itemizers can claim a deduction for damage to nonbusiness property. Two offsets apply:
- The loss that you calculate is first reduced by $100
- The balance is deductible only to the extent it exceeds 10% of adjusted gross income
(More generous rules apply for taking losses from disasters in 2018, 2019 and 2020.)
Business Losses
The rules for deducting casualty losses on business assets are more liberal. A business casualty loss needn’t be attributable to a federally declared disaster area, the $100 and 10%-of-AGI offsets don’t apply, and nonitemizers can write off losses.
Safe Harbors
Computing the amount of loss to your home or belongings can be difficult. Luckily, the IRS has multiple safe harbors to help you with this calculation.
For example, one method lets a homeowner with casualty losses of $20,000 or less take the lesser of two repair estimates to determine the decrease in the home's value. Another has a table to compute the replacement cost of personal belongings destroyed in the federally declared disaster. See Rev. Proc. 2018-08 (PDF download) for details.
Which Year Should You Deduct the Losses?
2023 disaster losses can be claimed on your 2022 or 2023 federal return. That’s because individuals can opt to take the loss on the return for the disaster year or the return for the year preceding the disaster.
If you’ve already filed your 2022 1040, you can amend it to take the write-off by filing Form 1040-X. Note that for this purpose, the filing due date for a 2022 amended return is six months after the normal filing date for 2023 returns. For 2023 disaster losses, this translates to Oct. 15, 2024.
Retirement-Related Easings
There are a few new retirement-related easings for disaster victims, thanks to the SECURE 2.0 legislation that federal lawmakers enacted late last year.
- The 10% penalty on pre-age-59½ distributions from IRAs and workplace retirement plans is waived on up to $22,000 per federally declared disaster. The payout must be taken within 179 days of the date the disaster is declared. Tax on these qualified disaster distributions can be paid over three years unless you opt to pay it all at once. Amounts re-contributed to the retirement account within the three-year time span are treated as nontaxable rollovers. Use Form 8915-F to spread the tax on the payouts. Income tax paid on a distribution that is later rolled over within three years of the distribution can be recovered by filing an amended return on Form 1040-X.
- Eligible individuals can borrow more from workplace plans such as 401(k)s up to the lesser of $100,000 or 100% of the account balance. Also, repayment terms can be extended by one year, if the plan otherwise allows for this disaster relief.
- Predisaster payouts to buy a home in a disaster area can be re-contributed to the retirement plan, provided the funds weren’t ultimately used to buy a residence.
IRS Resources
The IRS can be your friend in disaster-related situations. If you lost prior-year tax returns, there are multiple ways to get your tax information. Use the IRS’s free “Get Transcript” tool on its website to view and print a summary of your tax information, call the IRS’s automated phone transcript line at 800-908-9946, or mail Form 4506-T to the agency. If you want your actual return, mail Form 4506.
The IRS also has a dedicated phone line that you can call for disaster-related tax questions: 866-562-5227.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
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