Sandy Tax Deduction?

Nov 7, 2012 by

aerial image hurricane sandyWe all hope we never have the opportunity to take advantage of IRS Form 4684, Casualties and Thefts. But for the millions hit by hurricane Sandy and others who suffer losses of many types, you may be able to recoup a bit of your loss through a tax deduction from good ol’ Uncle Sam.

IRS Form 4684

From the instructions to IRS Form 4684, Casualties and Thefts:

You can deduct losses of property from fire, storm, shipwreck, or other casualty, or theft (for example, larceny, embezzlement, and robbery).

If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Otherwise, you cannot deduct the loss as a casualty or theft loss. However, the part of the loss that is not covered by insurance is still deductible.

So the first step, if your property is covered by insurance, is to file a claim. Once insurance is settled, if any of your loss wasn’t covered by insurance, you can deduct that un-reimbursed loss on your 2012 tax return.

How Much Is My Loss?

To the IRS, your loss is based on the Fair Market Value (FMV) of the property before and after the loss. Determining FMV is tricky business of course. Here’s what the instructions to Form 4684 have to say about it:

Fair market value (FMV) is the price at which the property would be sold between a willing buyer and a willing seller, each having knowledge of the relevant facts. The difference between the FMV immediately before the casualty or theft and the FMV immediately after represents the decrease in FMV because of the casualty or theft.

The FMV of property after a theft is zero if the property is not recovered.

FMV is generally determined by a competent appraisal. The appraiser’s knowledge of sales of comparable property about the same time as the casualty or theft, knowledge of your property before and after the occurrence, and the methods of determining FMV are important elements in proving your loss.

I’m not sure how you’d go about getting a before-loss appraisal of now-wrecked property; this may be a good question to ask a tax accountant. If you have photos or other documentation, those may well make for a reasonable—under the circumstances—basis for a before-loss appraisal.

You Must Itemize, and You Can’t Deduct The First Dollar Lost

Two more caveats to taking a casualty loss deduction:

  • You must itemize deductions (use Schedule A) to deduct a casualty loss, and
  • You can deduct only the amount of the loss that exceeds 10% of your Adjusted Gross Income.

So if you suffered a $20,000 loss in Sandy that’s not covered by insurance, and if your 2012 Adjusted Gross Income is $50,000, you could deduct $15,000 of the loss.

→ $20,000 loss less 10% of $50,000 AGI (= $5,000) = $15,000 casualty loss deduction

If you’re in the 15% tax bracket, a $15,000 deduction would save you $2,250 in taxes—quite a bit less than the loss you’ve suffered, but certainly worth your time I think in completing Form 4684.

How About You?

Did Sandy damage any property you own? Have you suffered any other casualty or theft losses in 2012 or in an earlier tax year? Did you take a tax deduction?

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