How to Deduct Hurricane Ike Casualty Losses
New laws were recently enacted that ease the rules for deducting casualties occurring in 2008 and 2009 in federally declared disaster areas such as those suffered by Hurricane Ike.
Some of these changes include when to take the loss deductions, who is eligible to take the loss deductions, how the loss deduction is calculated, and how to claim the loss deduction.
When to take the loss deductions
Normally loss deductions are taken in the year they are incurred. However for casualty losses incurred in a Federally Declared Disaster Area (such as Hurricane Ike/Houston), taxpayers may choose to take the loss on either their 2007 or 2008 tax return.
For most taxpayers, it will be quicker and easier to claim their losses on their 2008 tax return.
However, for some taxpayers, it might be to their advantage to amend their 2007 tax return, rather than including it on their 2008 tax return.
The IRS tax rate tables are progressive in nature. This means the more money you have in taxable income (total income less deductions and personal exemptions), the more money you will pay in tax on the last dollar of income that you earned.
Thus, a deduction could be worth more to you in 2007 than in 2008, if your income was more in 2007 than in 2008. For example, if you are married filing a joint return in 2007 and your taxable income is $175,000, your marginal tax rate is 28%. If your taxable income in 2008 is $131,450.00, your marginal tax rate is 25%. Thus, there is a difference of 3% in the marginal tax rates. If you incurred a casualty loss of $50,000 and deducted the loss in 2007 rather than in 2008, your total tax would be $1,500 lower ($50,000 x 3%=$1,500).
If you decide that you wish to take the deduction for 2007, you can do so by filing an amended return for 2007 (Form 1040-X). The deadline for filing an amended return and claiming the casualty loss for 2007 is April 15, 2009.
Who is eligible to take the loss deduction?
All taxpayers who incurred a casualty loss in a Federally Declared Disaster Area such as Houston, are eligible to claim their loss, even if they only claim the standard deduction (non-itemizers not filing Schedule A).
How the Casualty Loss is Calculated
Normally, casualty losses are deductible by the amount in excess of 10% of Adjusted Gross Income. This means that the losses comprising the first 10% of your Adjusted Gross Income are not deductible.
However, Hurricane Ike victims do not have their losses limited by 10% of Adjusted Gross Income. Your casualty loss is deductible from the first dollar, after deducting a $100 per-incident amount.
For example, if you incurred a $50,000 loss and your Adjusted Gross Income was $100,000, you would normally be able to deduct only $39,900 ($50,000 less $10,000 (10% of $100,000 AGI) less $100).
Under the rules for Hurricane Ike, you would be able to deduct $49,500 ($50,000 less $500). This is a difference of $10,000 in deductible expenses, which will save you $2,500 in taxes if you are in the 25% marginal tax bracket!
Note that the $100 threshhold was increased to $500 through 2009, apparently an attempt to limit smaller claims.
Casualty losses refer to actual physical damage only, less any insurance company reimbursements you received. Specifically excluded are evacuation costs, and temporary housing while you were repairing your home.
Not included are casualty and theft losses occurring in the Federally Declared Disaster Area that are not caused by the disaster. An example of this would be a fire or theft loss that occurred separate from damage caused by Hurricane Ike.
How to Claim the Casualty Loss Deduction
Taxpayers who do not itemize can deduct their loss by increasing the amount of the standard deduction that they claim, by the amount of the casualty loss.
Taxpayers who itemize their deductions will deduct the casualty loss by completing Form 4684, “Casualties and Thefts” and reporting the calculated amount on Schedule A, along with their other itemized deductions.
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Tags: Casualty Losses, Marginal Tax Rate, Rate Tables, Tax Return, Taxable Income