Next year, 2012, is supposed to be the year we lose it all, but 2011 came close. It's shaping up to one of the worst years ever for disaster losses.
Thanks to tax relief, it's not the end of the world.
The Internal Revenue Service (IRS) allows you a tax deduction for casualty losses, including losses due to property damage or destruction.
As is the case with deductions for mortgage insurance and property taxes, casualty loss is an itemized deduction included on Schedule A. Schedule A deductions are subtracted from your adjusted gross income, which reduces your taxes by reducing the amount of your income that is actually taxed.
First, the deduction is only available to the extent that insurance or other forms of compensation don't cover the cost of damage or destruction.
Second, if the disaster carries a presidential declaration, you can immediately, after the disaster has the presidential declaration, amend your last tax return to deduct the loss. Otherwise, you must wait to file for the deduction with your next tax return.
Third, state tax laws vary on casualty loss deduction and because the deduction can involve large amounts and complex calculations, you should seek the help of an enrolled agent, certified public accountant or other tax professional to help you complete you state and federal tax returns.
What's a casualty loss?
When it comes to a disaster, IRS The Internal Revenue Service defines a casualty loss as the "damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual."
That can include both natural and man-made disasters -- earthquakes, fires, floods, car accidents, vandalism, and yes, terrorist attacks. Under special provisions, IRS also considers damage from corrosive drywall as a casualty loss. Preventable losses, say mold buildup or illegal activities, say a methamphetamine lab, don't count.
The deduction for property damage is based on the decline in the fair market value of property due to damage or destruction, but you can't deduct the full amount of the loss and must follow a detailed calculation involving your adjusted gross income and the major portion of the loss to determine the actual deduction.
What's the deduction?
It begins with your adjusted basis in the property -- the purchase price plus improvements and other costs -- or the decrease in fair market value (which requires an appraiser's valuation) after the loss, whichever is less.
From either the adjusted basis or the decrease in fair market value, subtract what your insurer pays, plus any other compensation.
Take the remainder and subtract $100. In order to take the deduction, what's left must be greater than 10 percent of your adjusted gross income (AGI) in the tax year for which you are filing. Your AGI is at the bottom of Page 1 of your Form 1040.
"IRS Publication 547: Casualties, Disasters and Thefts," provides further details.