As many Texans, Floridians, and other states’ residents struggle with the severe devastation caused by Hurricanes Harvey and Irma, the immense financial costs associated with the recovery process are yet to be determined. Moody’s Analytics’ preliminary estimate of the economic damage to property from the two hurricanes is $150 billion to $200 billion. While FEMA (through the National Flood Insurance Program) will be providing financial assistance to the insured as well as some uninsured, the IRS is also lending support through tax filing extensions and allowing taxpayers to take deductions for casualty losses to homes and personal property.
Are you Covered?
Many homeowners have come to realize that damage from flood waters is not covered by their traditional homeowners insurance; whereas, financial losses due to the peril of wind damage (associated with hurricanes) is generally covered by homeowners insurance.
FEMA’s subsidized insurance program covers insured homeowners up to a maximum of $250,000 for damage to a dwelling and up to another $100,000 for contents. Additional support may be applied for through FEMA’s Individual Disaster Assistance program.
Depending on the kind of damage (flood, wind or both) that was sustained, it may not be entirely clear at this point which insurance policies will ultimately pay off.
What about the Uninsured?
Tragically, there are many homeowners and renters that sustained damage from flood waters that did not have adequate flood insurance. This may be the case if the homeowner did not live in the flood plain and chose not to have flood insurance. Or, they lived in the flood plain, did not have a mortgage, and opted out of flood insurance (mortgage companies require flood insurance for homes in the flood plain to protect the value of their collateral). Also, renters may not have adequate renters insurance to protect the value of their property from a flood.
The IRS provides additional assistance in the form of tax filing extensions and casualty deductions for residents affected by a natural disaster.
As is the case after many presidentially-declared disasters, the IRS gives both individuals and businesses more time to file certain tax returns and make installment payments. For most affected areas in Texas, tax returns and payments that were due September and October are now due January 31, 2018. Many parts of Florida will likely get similar relief. To see if your county qualifies, check the recent IRS new releases related to the storms.
Those unable to totally recoup their losses from insurance may be able to still get some economic relief from the government in the form of a tax deduction. Taxpayers in federally-declared disaster areas can deduct certain losses to their home or property. This would appear on Schedule A line 20 as “Casualty/Theft Losses.”
- Calculating the amount of loss is a several step process completed on IRS Form 4684:
- Determine adjusted basis in the damaged property before the casualty.
- Determine the decrease in the fair market value (FMV) as a result of the disaster.
- Subtract any insurance or reimbursement received or expect to receive as a result of the casualty from the lesser of adjusted basis or FMV.
- Reduce the amount of the loss by $100. This is on the aggregate amount for the disaster event not each item damaged.
- Next, reduce the amount by 10% of your AGI (Adjusted Gross Income). There is a possibility that this 10% rule will be waived; thereby providing more help to those with higher incomes.
- If the number is greater than 0, you can deduct from your income in the year of the loss.
- To expedite a refund, losses can also be taken in the year preceding the disaster. This requires filing an amended return. Taxpayers should consult with their tax-filing professional to ensure this is done correctly.
Document, Document, Document
Whether filing an insurance claim or taking a casualty loss deduction, having proper documentation as to the property and its value before and after the loss is crucial. According to FEMA, “the more accurately you estimate your loss, the more loan and grant money there may be available to you.”
The IRS has provided some useful recommendations on reconstructing records on their website.
Know Your Coverage and Risks
Unexpected natural disasters underscore the importance of making sure your home and other valuable property are adequately insured. Good risk management involves reviewing home, flood, auto as well as other insurance policies every few years to make sure those policies accurately reflect current values and insure against the appropriate risks.