Friday, February 12, 2010

Casualty Losses in Federally Declared Disaster Areas

It’s winter 2010 now, but remember back to the severe winter storms of 2009 in Arkansas, Washington State, and other places?

If you suffered losses to your home or other personal property in those storms, you may be eligible for a deduction for your losses, even if you do not itemize your deductions, because you lived in a federally declared disaster area.

You lived in a federally declared disaster area if you lived in any of these Arkansas counties (Benton, Conway, Johnson, Madison, Pope, Searcy, Van Buren, Washington, or Yell) or Washington State Counties (Pend Oreille, Spokane, or Stevens). These are a few areas I am familiar with; for a full list of 2009 federally declared disaster areas, see .

Here’s how it works:

A casualty loss can result from “the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, or earthquake.”

If it is personal-use property (I’ll address business-use property another time), the amount of your casualty loss is the lesser of the basis of your property (usually your cost increased plus improvements) OR the decrease in fair market value of your property as a result of the casualty.

For casualty losses NOT in federally declared disasters, you must further reduce your loss by 10% of your adjusted gross income. Then, only individuals who itemize deductions are able to deduct the casualty loss as an itemized deduction on Schedule A.

However, the National Disaster Relief Act of 2008 changed some of the tax rules pertaining to losses resulting from federally declared disasters. The new law is effective for losses attributable to disasters federally declared in taxable years 2008 and 2009. It provides the following:

• Allows all taxpayers, not just those who itemize, to claim the net disaster loss deduction regardless of the taxpayer's adjusted gross income

• Removes the 10 percent of adjusted gross income limitation for net disaster losses

• Provides a 5-year net operating loss (NOL) carryback for qualified disaster losses

This is only a brief overview of the provisions of this disaster relief act, and there are many limitations and restrictions on these provisions. However, if you suffered a loss during those winter storms last year, please check with me personally to see how these rules apply to your tax situation.