Casualty Loss Summary

sample insurance form for casualty loss and laptop

As we assess the damage, rebuild, and recover from Hurricane Ida, Stephen Albert, CPA and Richard Tullier, CPA briefly explain the tax deduction available to individuals for casualty losses. Read further for a casualty loss summary.

In general for insurance claims after hurricanes and other disasters: a casualty loss is determined by comparing any proceeds received to the decrease in value for the items damaged. For items that are worthless after damage, this value would be zero. However, for other items, it is unlikely that you had an appraisal done before the storm and immediately after. To alleviate that stress, the IRS provides safe harbor guidance to approximate losses. The methods for your residence and related real property allowed are:

  • Estimated repair cost – Use the lesser of two repair estimates by contractors
  • De Minimis Safe Harbor – Estimate your own cost of repairs (only for less than $5,000)
  • Insurance Safe Harbor – Use the estimated loss determined by the insurance company
  • Contractor Safe Harbor – Use contract price for repairs from an independent contractor
  • Disaster Loan Appraisal Safe Harbor – Use an appraisal prepared for the purpose of obtaining a loan from the Federal government

For personal belongings, the methods allowed to approximate losses are:

  • De Minimis Safe Harbor – Estimate your own cost of repairs (only for less than $5,000)
  • Replacement Cost Safe Harbor – Discounts replacement cost for an asset by 10% for each year you owned the property being replaced (not eligible for boats, trailers, vehicles, or antiques)

The IRS has clarified through recent guidance that losses from Hurricane Ida may be claimed on the 2020 tax returns filed this year or may be claimed in 2021.  This may mean amending your 2020 tax return if it has already been filed.  However, before amending, you should consider the implications:

  • Amending means that any reimbursements in 2021 or 2022 will be income when received in that year.
  • The casualty loss is currently limited by 10% of your adjusted gross income.
  • The casualty loss remaining after the above limit gets added to any itemized deductions claimed and to the extent it exceeds your standard deduction. For example, if you are married, your total itemized deduction would have to be greater than $24,800 to benefit.

If you choose to claim the loss on your 2021 taxes, there is a likelihood that this loss will become a Qualified Disaster Loss which means two things:

  • The AGI limit no longer applies.
  • You can take the loss in addition to a standard deduction.

With everything happening right now, the greatest take away is to keep your receipts, and reach out to us if you have any questions or concerns about this casualty loss summary and potential tax deduction.