Tax Benefits for Costs Not Covered by Insurance
The President has declared a federal disaster area for all counties throughout the states of Florida, North Carolina, and South Carolina due to the storm. In addition to the relief related to tax deadlines (in general to February 15, 2023) and payments for taxpayers who live or have a business in the disaster areas or have tax preparers located within a qualified disaster area, anyone who has sustained a loss of property within the disaster zones may also qualify for special loss deductions.
Determining Your Deductible Loss
In general, if you suffer an economic loss due to a casualty you may claim a deduction on your federal income tax return. A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. Currently personal casualty losses are deductible only if the loss is attributable to a federally declared disaster (federal casualty loss). While federal disaster losses are not subject to any adjusted gross income limitations, there is a $500 threshold. Thus, the deductible loss is limited to the amount over $500.
The amount of your casualty loss is the lesser of 1) the decrease in adjusted basis of your property or 2) the decrease in the FMV of the property and subtracting any insurance or other reimbursements you have received. In some cases, the amount expended to restore the property to its original condition can be used as the measure of the decrease in FMV.
You can elect to deduct your Hurricane Ian related disaster losses on your 2022 or 2021 return. The election to claim on the previous year must be made no later than six months after the original due date for filing your current year return (October 15, 2023).
If your home is located in a federally declared disaster area, you can postpone reporting any gain if you spend the reimbursement to repair or replace the home. Special rules apply to replacement property related to the damage or destruction of your main home (or its contents) if located in these areas.
Insurance Proceeds and Other Reimbursement
If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when figuring your loss. If in the year of the casualty there is a claim for reimbursement with a reasonable prospect of recovery, the loss isn’t sustained until you know with reasonable certainty whether such reimbursement will be received. If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when figuring the loss. You must reduce your loss even if you don’t receive payment until a later tax year.
Reconstructing records after a disaster may be essential for tax purposes, getting federal assistance or insurance reimbursement. After a disaster, you might need certain records to prove your loss. The more accurately the loss is estimated, the more loan and grant money there may be available. If you have lost some or all of your records during a disaster, there are some simple steps to take that can help. The following information includes steps to take after a disaster, so you can reconstruct your records and prove loss of personal-use and business property.
The IRS will provide affected taxpayers with copies of prior year returns without charge. To get this expedited service, taxpayers should:
- add the disaster designation at the top of Form 4506, Request for a Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return;
- and submit it to the IRS as directed in the instructions to the form.
Individual taxpayers may also request transcripts of their tax account by visiting the IRS website at https://www.irs.gov/individuals/get-transcript. This online service is free to taxpayers but will require account registration. You may also call toll-free at (800)908-9946 and follow the prompts in the recorded message to request a transcript.
Our HSC team members are here to help you in dealing with missing or lost tax documents. We can obtain authorization and communicate with the IRS on your behalf to access your records electronically through our tax practitioner services.
Navigating the disaster loss rules can be challenging, however, the HSC team is here to help you in your time of need. We can answer questions regarding your tax situation and identify available resources for a smooth recovery. Please contact your HSC advisor if you need further assistance in gathering your tax information after the storm.