If you had a casualty loss in an officially-declared federal disaster area last year and you haven't included the loss in a previous federal tax return, you have until April 15, 2002 to include the loss in your tax return.

There were 44 events that lead to declarations of federal disaster last year, and many of them affected homes and their contents.

Among the events that led to the declarations were storms, freezes, floods, tornadoes, an earthquake and the nation's greatest disaster ever, according to the Federal Emergency Management Agency (FEMA).

On Sept. 11, 2001, hours after terrorists reduced the World Trade Center's 110-story twin towers to rubble, injuring and killing thousands, President Bush declared as a federal disaster area, portions of Bronx, Kings, New York (the boroughs of Brooklyn and Manhattan), Queens and Richmond counties.

Ten days later, Bush also declared Virginia's Arlington County a federal disaster area. Terrorists had also attacked the Pentagon, which is in Arlington County.

FEMA says more than 52,500 people affected by terrorists attacks have registered with FEMA for state and federal disaster assistance and more than $285.5 million in individual assistance has been approved in the form of grants and loans.

The numbers include temporary disaster housing assistance; mortgage and rental assistance; disaster food stamps; disaster unemployment assistance; individual and family grants; crisis counseling; Small Business Administration low-interest disaster loans to homeowners, renters and businesses; and crime victims' assistance.

The federal agency also has approved more than $25 million in disaster housing assistance grants for affected households to obtain alternate rental housing or to clean up residences made unlivable by the attack.

To the extent that FEMA benefits, insurance or other forms of compensation didn't cover the cost of losses due to the events of Sept. 11 or any other federal disaster, your loss in damage to your property and its contents, may be eligible for a tax deduction.

Depending upon your financial situation, you may need the deduction more one year than the next, but that's not an option if you haven't already filed for any 2001 casualty loss.

When a disaster is declared, taxpayers have the option of filing for casualty losses in the year of the event. If April 15 has passed before the disaster event, they can file an amended return as late as Oct. 15 in the year of the disaster. Those who miss that date must file by the following April 15th.

Without a federal disaster declaration, taxpayers don't have a filing option, and must file for a casualty loss deduction with the tax return of the year in which the loss occurred.

Figuring Your Deduction

State tax laws vary on casualty loss deductions due to federally declared disasters and because casualty loss deductions often involve large sums and complex tax calculations, you should seek the help of a knowledgeable tax professional to complete your return.

"The Internal Revenue Service looks carefully at casualty losses. They are big and they are unusual and they stick out on a tax return," said Marie Sternberger, an enrolled agent practicing in Sunnyvale, CA.

Here's what you'll need to consider. The points underscore the importance of maintaining documented evidence about the value of your home and its contents.

First, calculate the actual value of the property before the disaster and subtract its value immediately after the disaster. For instance, if your home was worth $400,000 before the damage and now it's worth $300,000 the difference is $100,000.

"Always get an appraisal anytime you have a large loss. It is an inarguable document," says Richard Fisher, a tax consultant in San Jose.

Compare that amount to the "adjusted basis" of the same property -- your purchase price, plus any improvements made before the disaster. If you purchased the house in 1970 for $40,000 and added $10,000 in home improvements, your basis is $50,000.

Use the lesser of the adjusted basis or the cost to rebuild the house to compute the taxable loss. Based on the example, that amount would be $50,000. Even if your home is destroyed, you are eligible for a deduction based on the lesser of the two amounts as explained above.

Remember, the cost to rebuild is based only on what it will cost to return your home to its condition before the damage. It does not include additional improvements you might consider now that, say, a quake shook away the back of your home along with the chimney. Ask your tax consultant about the wisdom of performing improvements while you are filing for a casualty loss.

From the lesser of the two amounts, subtract any benefits from your insurance company, disaster relief or other financial assistance. Also subtract your adjusted gross income multiplied by 0.10 (10 percent).

"Prior to 1982 I used to see a lot of audits in casualty losses because of small fender bender type claims. In 1982 the law changed to say the amount of the loss has to exceed 10 percent of your adjusted gross income, that eliminated small casualty loss deductions," Sternberger said.

Finally, subtract $100. The amount remaining is the casualty loss you may claim.

As is the case with deductions for mortgage insurance and property taxes, casualty loss is an itemized deduction included on Schedule A. Those deductions on Schedule A are subtracted from your adjusted gross income, effectively reducing your taxable income.

Some casualty losses will generate a negative income and you can elect to carry that loss back three years (and amend past returns) or forward for up to 20 years to reduce your past or future income and the taxes you pay.

Again, the complexity of the calculations required when the loss generates negative income underscores the need for professional assistance.

For Further Assistance

Surf the Web to Internal Revenue Service Forms & Publications for IRS Form/Instructions 4684 ''Casualties and Thefts'' to calculate casualty losses. IRS Publication 584, "Casualty, Disaster, and Theft Loss Workbook" offers additional details for calculating your loss. With your state return, attach copies of the federal Schedule A and related casualty-loss forms and worksheets.

A discussion of Disaster Area Losses is also available online as is free IRS assistance.

For more articles by Broderick Perkins, please press here.

Published: January 23, 2002

Use of this article without permission is a violation of federal copyright laws.

A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.