Every year, worldwide natural disasters cause hundreds of billions of dollars in damages.
Some of these damages can indeed be covered by homeowners’ and renters’ insurance policies. For many people, though, this isn’t enough, and they end up spending their hard-earned money to put their lives back together after disaster strikes.
If you’ve recently experienced financial setbacks related to a natural disaster, there is some good news.
You may qualify for certain natural disaster tax relief deductions.
Explore these seven tips that will help you ensure you get the deductions you deserve.
Calculating Disaster Relief Tax Deductions
The principal tax deduction available to victims of natural disasters is known as a casualty loss deduction. This deduction allows you to deduct the cost of certain losses that you experienced as the result of a fire, flood, or another disaster.
When calculating the value of this deduction, you’ll start by calculating the adjusted basis of your property (this refers to the amount of money you paid for it, with certain adjustments made for depreciation and improvements to the building) and the fair market value of your property. The lesser of the two numbers is the amount of loss you’ve experienced.
Once you have this number, you’ll deduct insurance proceeds that went toward repairs to your property and take some other factors into account (more on those later) to get the exact number you’re able to deduct from your final tax bill.
Other Disaster Relief Tax Benefits
There are also some additional tax benefits for which you may qualify. Consider these other benefits if you’re getting ready to file taxes after experiencing a natural disaster:
If you’re a victim of a natural disaster, you may be able to qualify for a tax extension. The IRS understands that the stress of experiencing a natural disaster can cause people to put other things, including the process of filing their taxes, on the back burner.
The key is to make sure you apply for a tax extension. Don’t just assume that one will be granted to you. Remember, you also have to pay any money you owe by the tax deadline; extensions are for filing, not for payment.
Speaking of payment, you may qualify for certain fee waivers, too. For example, if you need to get new copies of past tax returns that were lost in the disaster or need to have them expedited to you right away, you will likely qualify to have the fees associated with these requests waived.
Loan and Hardship Withdrawals
Normally, it’s very difficult to make withdrawals from 401(k) accounts. The IRS may make exceptions, though, and allow you access to these funds if you’re the victim of a disaster. They may allow you to make a hardship withdrawal or take out another type of loan to help cover the expenses associated with the particular disaster you’ve experienced.
Top Seven Tips for Utilizing These Deductions
Are you interested in making specific, disaster-related deductions when filing your taxes? Do you want to take advantage of the other tax benefits available to you?
If you answered “yes” to either of these questions, here are seven tips to keep in mind. They’ll help you ensure you accurately handle the deduction process and get as much money back as possible:
1. Take Insurance Into Account
Remember to take your insurance payout into account when calculating your casualty loss deduction.
If you don’t subtract the insurance payout from the total amount of losses you experienced, you’ll end up with a much higher deduction than is allowed. This, in turn, can result in trouble with the IRS later on.
2. Know When to Deduct
In general, you need to deduct disaster-related expenses during the same year that the disaster occurred. There is an exception, though, if you have losses from an area that’s been deemed a federal disaster area.
In these cases, you choose to deduct your disaster casualty when the loss first occurred or deduct it from the previous tax year on an amended return. If you decide to work with a tax professional and get help amending your return, you could end up getting a refund for that year.
3. Follow the $100 Rule
The $100 rule requires you to subtract $100 from each casualty loss you’ve calculated on your personal-use property.
You’ll need to make this reduction for every casualty loss event you experienced during the tax year.
4. Follow the 10 Percent Rule
The 10 percent rule also requires you to calculate 10 percent of your adjusted gross income. Then, you must subtract that amount from your total casualty losses.
5. Complete the Proper Forms
In order to benefit from a disaster relief tax deduction, you need to make sure you itemize your deductions and fill out the proper forms. This includes completing Form 4684.
6. Don’t Factor in Future Income
Remember that you’re not allowed to factor in potentially lost future income when calculating your disaster loss deductions.
You may be tempted to do this to try and qualify for a larger deduction. If you fudge the numbers, though, it will almost certainly come back to haunt you later.
7. Consider Business Differences
In the same way that solar energy and environmental tax credits differ when it comes to personal property and business property, the same is true of disaster relief deductions.
If your business was damaged as a result of a natural disaster, remember that you may have to handle those deductions separate from your personal tax filings.
Find Out if You Qualify for Natural Disaster Tax Relief Today
Now that you know more about disaster relief tax deductions, are you ready to find out what kinds of deductions you qualify for?
If you don’t have the time or know-how to research these deductions on your own, or if you just want to make sure you don’t miss anything, consider working with a tax professional today.
At Silver Tax Group, we have trained and experienced tax professionals available 24 hours a day, seven days a week to help you with all your tax-related questions. Contact us today to learn more about our services or to ask a question about your case.