How natural disaster victims can claim their tax deductions

A mother sitting in an open field, holding her young son in her lap and comforting him.Image: A mother sitting in an open field, holding her young son in her lap and comforting him.

In a Nutshell

If you were a victim of a natural disaster in 2017, you may qualify for some special tax breaks. Here’s how to find out if you qualify, and how to maximize any tax refund you might be owed.
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This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®.

You made it through hurricane or wildfire season, but now you have to face tax season.

The good news is, if you were affected by a natural disaster in 2017, tax season just might help you recover. Taking advantage of natural disaster tax deductions and other tax breaks could help you reduce your tax burden and maximize any refund you’re owed.

For victims of natural disasters, the tax code offers both long-standing tax breaks for casualty losses and provisional tax relief for specific disasters. We’ll cover some things you should know so you can maximize the deductions and other relief available to you and, as a result, your tax refund.

Casualty loss deduction

If your home suffered damage during a natural disaster or another eligible event, such as a fire or vandalism, you might qualify to deduct some of the loss amount.

If the natural disaster is a federally declared disaster, you can typically choose to deduct the loss in the tax year the disaster occurred or the year prior, through an amended return if necessary. For more information on federally declared disasters with tax relief, visit the IRS.

But be aware that there are limitations.

“All casualty loss calculations are offset by insurance proceeds received,” says Patrick Leddy, a CPA and partner at Farmand, Farmand & Farmand LLP in Jacksonville, Florida. “However, in the common situation where insurance is only covering a portion of your loss, this deduction can be very beneficial.”

Here’s how to determine how much you can deduct.

  • Calculate the adjusted basis of your property before the casualty — usually how much you paid for it with adjustments for improvements and depreciation — and the decrease in the fair market value of the home as a result of the damage. The amount of your loss will be the lesser of the two figures.
  • Don’t include loss of future income or profits in your calculation.
  • Subtract any insurance proceeds or other reimbursements you received or expect to receive for the loss from your total loss amount. For example, if your loss was $20,000 in damages to your house, and your homeowner’s insurance paid you $12,000, you must subtract the insurance payout, ending up with a loss of $8,000.
  • If it’s personal-use property — as in, you’re not using it as an investment — reduce the loss amount after insurance and reimbursements by $100, and then reduce it by 10 percent of your adjusted gross income. For example, if your loss was $20,000 after insurance, reimbursements and less $100, and your AGI is $75,000, you will subtract 10 percent of your AGI ($7,500) to bring your loss amount to $12,500.
  • You must itemize your deductions on your tax return, using Form 4684 and Schedule A, to include natural disasters tax deductions.

If the property was for business or investment purposes and was stolen or completely destroyed, your loss is your adjusted basis less any salvage value and insurance or other reimbursements.

Also, that business or income-producing property won’t be subject to the $100 and 10 percent reductions, but may be limited in other ways. Credit Karma Tax® can help you determine potential limitations by walking you through the filing process step by step.

Provisional tax relief

In addition to the casualty loss deduction, the IRS has also offered provisional relief for victims of specific disasters.

“The IRS has recently introduced some safe harbor calculations, which can simplify and streamline the deduction calculation [for victims],” says Leddy.

Also, eligible victims of wildfires, flooding, mudflows and debris flows that occurred in California in 2017 can take advantage of certain postponed deadlines, including estimated tax payments that were due on Jan. 16, 2018, and individual income tax forms due on April 17, 2018. Eligible victims have until April 30, 2018, to make those estimated payments or file their 2017 federal income tax returns.

If you donate to a qualified charitable organization that benefits natural disaster victims, you can deduct the contribution if you itemize your deductions. And if your qualifying donation was made to relief efforts in a designated disaster area, such as the Hurricane Maria area, a higher percentage of your charitable contribution can be deducted. But if you help out a specific individual or family, including your own family members, your contributions aren’t deductible at all.

Get your records in order

The IRS may require that you provide evidence for your loss, so it’s critical that you get all your records in order. And if possible, take photographs or videos of the extent of the damage

Here are a few things to keep filed away.

  • Documents from your lender, title company or escrow company that could help establish your basis
  • A copy of your latest appraisal or other information to establish the fair market value of the home before the disaster
  • Statements from contractors, if you’ve made improvements to the home since buying it

If you’ve lost some of your tax documents in the disaster, it may be difficult to file your taxes on time. To help you avoid delays, the IRS allows you to get transcripts or copies of previous tax returns online or by mail. You can request your transcripts through the IRS website or by filling out and mailing Form 4506-T.

If you want a full copy of previous returns instead of a transcript, fill out Form 4506 instead. To avoid the normal fees on these requests and to get them faster, write the appropriate disaster name, such as “Hurricane Irma,” in red letters across the top of either Form 4506 or Form 4506-T.

And it helps to keep your records handy after you’ve filed your federal income tax return.

“For any deduction or credit, I suggest keeping all supporting documentation with your annual tax records,” says Leddy. “You always need to be comfortable that you can defend your deduction to the IRS in case of an audit.”


The future of natural disaster tax deductions

While you may become a victim of a natural disaster sometime in the future, it’s possible that you won’t be able to deduct any of your losses.

With the Tax Cuts and Jobs Act, Congress made some changes to the provision. Specifically, the law states that you can deduct casualty losses from a natural disaster only if it’s a federally-declared disaster.

As a result, minor natural disasters might not fall under that category, leaving you without recourse in terms of a tax break if you’ve experienced a fire or other event that isn’t federally recognized.

Bottom line

While tax provisions designed to help natural disaster victims won’t restore everything you had, they can help reduce your tax burden, though there are limitations. Get your documents in order and visit Credit Karma Tax® to help determine any natural disaster tax deductions you might be eligible for.

Learn more about how to get back on your feet financially, including mistakes to avoid, after a natural disaster.

Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Credit Karma, you can find his wo… Read more.