Over the weekend, Hurricane Harvey (now Tropical Storm Harvey) made landfall on the Texas coast. The impact was immediate and devastating. The storm dumped more than 24 inches of rain on Houston alone over a 24-hour period. Rainfall totals could reach more than 50 inches in Texas as the storm moves into Louisiana.
While the danger has not yet passed – and the full economic impact to the area is still unknown – there are steps that residents who are affected can take to recover some of the losses. If you are seeking information on immediate disaster relief or how to file a claim through the National Flood Insurance Program (NFIP), visit disasterassistance.gov.
Taxpayers who suffer economic loss due to a natural disaster like a hurricane can claim a casualty loss deduction on their federal income tax return. A casualty loss is defined as the damage, destruction or loss of your property from any sudden, unexpected, or unusual event. That includes a hurricane, flood, tornado, fire, earthquake or even volcanic eruption. A casualty loss does not include normal wear and tear or damage that happens over time, like termite damage.
To claim a casualty loss on your federal income tax return, you must itemize your deductions using Schedule A, Itemized Deductions (downloads as a pdf). You’ll report the loss on line 20 of that form. You’ll find it just below the section where you’d report charitable gifts:
So what’s that number? You’ll need to calculate the loss using federal form 4684, Casualties and Thefts (downloads as a pdf). On Page 1, at Part A of that form, you’ll report any damage or loss of personal-use property like your home or car. On Page 2, at Part B of that form, you’ll report any damage or loss of business or income-producing property.
If your property is personal-use property or is not completely destroyed, the amount of your loss is the lesser of your adjusted basis or the decrease in fair market value of your property because of the damage. For this purpose, your basis is typically what you paid for the item plus any long-term improvements (like an addition).
If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis. For this purpose, your basis is typically what you paid for the item plus any long term improvements less any depreciation that you might have previously claimed for your business property.
To the extent that you could salvage your property or if you were reimbursed by insurance, you must report those adjustments. If you expect to be reimbursed by insurance but haven’t yet received any money, you have to report that, too. Don’t worry: you can always amend your return (or otherwise report the adjustment on next year’s return) if it turns out that you received more or less than expected.
Some property may not be covered by insurance. Unfortunately, according to figures from the NFIP, most homes affected by Harvey are not covered by flood insurance. Just 15% of homes in Harris Country, home to Houston, are covered by flood insurance; the number tips to just 20% in neighboring Nueces County.
For damage not covered or reimbursed by any insurance, subtract $100 for each event (meaning storm or disaster). Next, subtract 10% of your adjusted gross income (AGI) from that amount to calculate your allowable loss.
Here’s a quick example:
Your AGI is $50,000. You suffered damage to your home during Hurricane Harvey and the value of your home decreased by $15,000. You received $2,000 in insurance money. Your initial loss is $15,000 less $2,000 (insurance), or $13,000. That amount is reduced to $12,900 ($13,000 less $100). Finally, subtract $5,000 (10% of your AGI). Your casualty loss, for tax purposes, is $7,900.
If, after you figure your loss deduction, it’s more than your income, you may have a net operating loss. However, you don’t have to own a business to claim a casualty loss. You can find out more about operating losses here.
As with most deductions, you’ll want to keep excellent records. It’s a good idea to take pictures of the damage: hopefully, you have some before pictures to compare to the after. Keep receipts of repairs and replacement values. In some cases, you may need or want to obtain an appraisal.
Casualty losses are generally deductible in the year the loss occurred. However, if you have a casualty loss from a federally declared disaster, you can choose to treat it as having occurred in the previous year.
For a list of federally declared disaster areas, check out the Federal Emergency Management Agency (FEMA) website. As of today, a disaster due to Hurricane Harvey had been declared in the following counties: Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria, and Wharton.
Additional tax relief may be available, including extensions of time to file and make payments.
As terrible as disasters are, they can also bring out the good in people. Remember that your gifts to qualifying charitable organizations are tax deductible (assuming you itemize) in the year that you make the gift. Be generous, be smart and get receipts. You can find out more here.