Casualty Tax Relief

Although we sincerely hope Hurricane Ian did not greatly impact you, we wish to be proactive with our clients that did sustain hurricane damage and/or losses by providing this information as a guide. Please reference the links below, including IRS relevant publications, information on utilizing the Safe Harbor Method for loss and fair market value (FMV) calculations, (see highlighted section 4 and 5) and the Hurricane Ian Casualty Losses Worksheet we created to ensure you have all the items necessary when it comes time to file your tax returns for 2022.

The Disaster Tax Relief Act is designed to assist those affected by disasters, such as hurricanes, and helps to ease the restrictions of the normal casualty loss rules.

The benefits to this act are:

It eliminates a requirement that personal casualty losses must exceed 10% of adjusted gross income to qualify for a deduction. The casualty loss deduction is also now available to taxpayers who do not itemize deductions.
Casualty Losses include loss of food, or other spoilage due to lack of electricity, landscaping, roofing, etc. (please see how to calculate your losses below).
NOTE – this act applies for personal casualty losses in excess of $500.

Things to consider as you evaluate your losses under this Act and with insurance:

The casualty losses related to this Disaster Tax Relief Bill can be deducted on EITHER the original return for the year the loss occurred (2022), OR on an amended return for the year immediately preceding the year in which the casualty losses occurred (2021).
No casualty loss deduction is allowed to the extent the loss is reimbursable. If the reimbursement exceeds the tentative loss, the taxpayer may then have taxable income.

How to Calculate Your Losses

Here are three steps to assist in calculating the casualty losses:

Determine the adjusted basis of the property before the loss.
Determine the decrease in fair market value (FMV) of the property as a result of the casualty or loss.
From the smaller amount determined in steps 1 and 2, subtract any insurance or other reimbursement received, or expected to receive. Also subtract the baseline cost of $500.

Therefore, to calculate the decrease in FMV from a casualty, a determination must be made of the actual price the property could have sold for immediately before and immediately after the loss. The IRS also has worksheets to assist in the calculation of loss, and those can be accessed here:

Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)

Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook

Publication 547, Casualties, Disasters, and Thefts

Other measures can be used in calculating the loss due to casualty, such as cleaning up and making repairs. Many situations will require an independent appraisal of the loss before action can be taken. The appraiser must be a recognized expert in the field relating to the property being appraised. Even though appraisal fees can be significant, the lack of an appraisal can subject the taxpayer to penalties and other potential issues.