CASUALTY LOSSES IN FEMA DISASTER AREA

Tax relief is part of a coordinated federal response to the damage caused by winter storms in February 2021 and is based on local damage assessments by FEMA. Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses may be able to deduct a casualty loss, choosing to claim the loss on either the return for the year the loss occurred (in this instance, the 2021 return normally filed next year) or the return for the prior year. This means that taxpayers can, if they choose, claim these losses on the 2020 return they are preparing this tax season.

Affected taxpayers claiming the disaster loss on a 2020 return should put the Disaster Designation “Severe Winter Storms” in bold letters at the top of their tax form. Also, include the disaster declaration number on any return – FEMA #4586 for Texas or FEMA #4587 for Oklahoma.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements on Form 4684, Casualties and Thefts. Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return if the loss is caused by a federally declared disaster proclaimed by the President. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement.

If your property is personal-use property or isn’t destroyed, the amount of your casualty loss is the lesser of (1) the adjusted basis of your property, or (2) the decrease in the fair market value of your property as a result of the casualty. If your property is business or income-producing property, such as rental property, and is destroyed, then the amount of your loss is your adjusted basis.

You may deduct the qualified disaster loss without itemizing your deductions.  If your loss deduction is more than your income, you may have a net operating loss (NOL). You don’t have to be in business to have an NOL from a casualty.

Please contact us if you have questions. We can help you ensure you file an accurate return that takes advantage of all of the deductions available to you.