Hurricane Michael, which struck the Gulf Coast on October 10, 2018, caused massive destruction to homes, schools, churches and businesses across the Florida Panhandle, resulting in physical devastation and many casualty losses.
What is a Casualty Loss?
A casualty loss is defined as the damage, destruction or loss of property resulting from an unexpected event, such as a flood, hurricane or tornado. A casualty loss is calculated as the lesser of (1) the fair market value of the property immediately before the casualty less the fair market value after the casualty or (2) the adjusted basis of the property less any insurance or proceeds received.
Who can take a Casualty loss?
The tax code allows for the deduction of a loss if it is connected to a trade, business or a transaction entered into for profit. If a loss is not related to business, it can be deducted as a personal casualty loss, but, historically, additional limitations have applied. These limitations associated with a personal casualty loss are a $100 limitation per casualty and an overall limitation of 10 percent of the taxpayer’s adjusted gross income.
How Did the Recent Tax Cuts and Jobs Act Affect Casualty Loss Deductions?
With the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017, the personal casualty loss deduction for tax years 2018 through 2025 was significantly limited for those with losses outside of federally declared disaster areas. As of October 15, 2018, the President has declared that a major disaster exists in the states of Florida and Georgia from Hurricane Michael.
Individuals who reside or have a business in Bay, Calhoun, Franklin, Gadsden, Gulf, Hamilton, Holmes, Jackson, Jefferson, Leon, Liberty, Madison, Suwannee, Taylor, Wakulla and Washington counties in Florida will receive tax relief.
Deadlines were also extended for certain taxpayers affected by Hurricane Michael in the Georgia counties of Baker, Bleckley, Burke, Calhoun, Colquitt, Crisp, Decatur, Dodge, Dooly, Dougherty, Early, Emanuel, Grady, Houston, Jefferson, Jenkins, Johnson, Laurens, Lee, Macon, Miller, Mitchell, Pulaski, Seminole, Sumter, Terrell, Thomas, Treutlen, Turner, Wilcox, and Worth.
Any other changes to how Casualty Losses are Calculated and Deducted?
A net casualty loss located in a disaster area no longer needs to exceed 10 percent of adjusted gross income to qualify for the deduction. However, the limit per casualty is $500, as opposed to $100 for personal casualty losses. A taxpayer who chooses not to itemize a deduction can add the net disaster losses to his or her standard deduction. There are also multiple safe harbor methods to help with the burden of calculating personal casualty losses.
What other Tax Relief is granted?
This disaster relief extends tax-filing deadlines falling on or after October 7, 2018 and before February 28, 2019 by granting additional time to file through February 28, 2019. This provides taxpayers with extensions to file their 2017 tax returns, quarterly estimated tax payments and payroll/excise returns due during this period. Affected taxpayers in the federally declared disaster area also have the option of claiming disaster-related casualty losses on their federal income tax returns for either the year in which the event occurred or the prior year. Taxpayers can even amend their 2017 tax returns to recognize the casualty loss resulting from Hurricane Michael. Affected taxpayers claiming the disaster loss on a 2017 tax return should put the Disaster Designation, “Florida, Hurricane Michael” at the top of the form so that the IRS can expedite the processing of the refund.
What Should I Prepare or Know Now?
- Take pictures of everything that is a loss, especially high-end valuables.
- Keep and track receipts of items bought during recovery efforts.
- Know your coverage. Be aware of deductibles. Does your policy reimburse hotel or rental home expenses if you are displaced? Does your policy provide replacement cost coverage or actual cash value?
- Be aware that some insurance reimbursements and government agency funds are not required to be recognized as taxable income. Insurance payments received to cover living costs when displaced are excluded from income Payments received from a government agency for the cost of moving are also not included in income.
- Know that if you have a business or home in a FEMA-declared disaster area, you may have a tax-deductible casualty loss. If you are outside of these counties, your deductible personal casualty loss is limited to the extent of personal casualty gains.
- Know that you may have a casualty gain if the damage is to property that has appreciated since acquisition. If the amount of insurance reimbursement is more than the adjusted basis but less than the current value, a gain may be realized. You can elect to defer the gain recognition on your tax return by purchasing replacement property within a period that begins when the casualty occurred and ends two years after the close of the first tax year in which any part of the gain is realized.
- Be aware that using a safe harbor method to compute the casualty loss will not be challenged by the IRS, eliminating the potential need for costly litigation.
- Talk to your tax advisor as soon as you can about what information is needed to calculate the loss and if it would be beneficial recognize the loss on your 2017 tax return.
If you have questions about casualty loss, or tax relief associated with Hurricane Michael, please contact your Warren Averett advisor or call 850-244-5121.