Garden City, NY—January 30, 2013—If it’s possible that any good news can be associated with Hurricane Sandy, it may come from an unlikely source—the IRS. There may be deductions, tax credits and other ways to help out at tax time for individuals and businesses affected by the storm. But as with all things tax-related, it’s complicated and figuring out how to take full advantage on your return can be tricky.
Above all else, the Casualty Loss Deduction may have the most potential to benefit those who’ve sustained storm damage. To qualify, a loss must be due to a sudden, unexpected or unusual event including fires, storms, car accidents, etc. Losses from Sandy damage certainly qualify, but to ensure the full deduction they’re entitled to, the burden is on the taxpayer to provide extensive documentation.
It is not as simple as calculating the cost of repair and replacement. The IRS applies a formula that is based upon the difference in the fair market value of your home pre and post Sandy. It’s a seldom used deduction because frankly, apart from infrequent and random catastrophes like Sandy, it doesn’t usually apply to the average taxpayer. In fact many accountants are scrambling now to understand how exactly to calculate the deduction. Since my own home in Babylon, which I had just finished renovating, was flooded with more than two feet of water I became an expert on this deduction.
Essentially, the IRS considers the difference in fair market value before and after the storm, subtracts $100 and any insurance payments received and finally reduces that number by 10% of your adjusted gross income to arrive at the casualty loss deduction.
The calculation itself isn’t complicated, but arriving at an acceptable figure means a taxpayer may need to involve an appraiser and will need detailed estimates from contractors and receipts for all repairs and items replaced. Before and after photos are always helpful.
The IRS permits you to claim the loss in the year it occurred and if needed, to carry it back up to three years or carry it forward for twenty years.