Natural disasters, accidents, and criminal acts turn lives upside down every day. A house fire, flood, burglary, ice storm—they all pose serious threats to both personal safety and finances. No one likes to think about it, but the hard truth is that a single event can affect a person or family for many years to come.
It’s often not possible to predict or prevent these tragedies, but there are some things everyone can do to protect themselves. Simple things like keeping up on home maintenance such as basement waterproofing, investing in a security system, practicing fire safety, and equipping your home with emergency stores of food and water can help alleviate the damaging effects of an unfortunate event. But a little-known way to prepare for disaster is to educate yourself on how losses incurred during a tragedy can affect your tax return.
When inclement weather or another event has major impact on your property, you may be able to deduct these losses on your tax return as “casualty losses.” A casualty loss is defined as a piece of property that has been damaged, destroyed, or lost as a result of a sudden, unexpected, or unusual event. A possible example of something that could be considered a casualty loss would be a tree that fell onto a home as a result of a rotten trunk, causing damage to the home’s roof.
If the loss occurs in a region that has been deemed a “disaster area” by the President, it is categorized as a disaster loss. A casualty loss must be deducted from the tax return filed for the year in which it occurred, while a disaster loss can be filed in the year of or prior to the loss. Damages sustained by a home as a result of a hurricane that damaged an entire region might be considered a disaster loss.
Casualty losses fall into two categories: business or personal. Business losses are fully deductible (without limitations), but there are restrictions on personal losses. Additionally, several factors, such as insurance reimbursement, may affect your casualty losses. Make sure you check in with Taxation Solutions, Inc. for assistance in determining the deducible loss of each item and determining the total casualty loss.