Tax Savings Available From Hurricane SandyNovember 12, 2012
Andrew S. Lattimer, CPA and Cynthia Teixeira, CPA
On October 29, 2012, Hurricane Sandy made landfall in southern New Jersey, a storm so massive in size that it impacted several states in the Northeast and Mid-Atlantic. Hurricane Sandy caused destruction and devastation for many families and businesses on the East Coast as the severe winds and coastal flooding have left millions of people without power. Early damage estimates suggest that Sandy has caused billions of dollars in damages.
As our heart goes out to all those impacted by the storm and as we all struggle to rebuild business and communities, it is important to keep in mind that there is the potential to recoup some of your losses from the storm through tax savings.
An itemized deduction may be available for personal losses as a result of this storm as either a casualty loss or disaster area loss. A casualty loss deduction is only available for physical damage or loss to your property from fire, storm, shipwreck or other casualty or theft. A disaster loss is a casualty loss incurred in an area determined by the President of the United States to warrant federal disaster or emergency declaration.
With a disaster loss you can elect to claim the loss in either of two years: the tax year in which the loss occurs or in the year that immediately precedes it. Choosing to take the deduction in the preceding year may increase the tax savings from the loss and may enable you to get a refund from the IRS before you even file your tax return for the year the loss occurred.
If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss; otherwise, you cannot deduct the loss as a casualty or theft loss. However, the part of the loss that is not covered by insurance is still deductible. Any related expenses incurred due to the casualty, such as hotel rentals or restaurant bills, are not deductible as a casualty loss.
The loss is measured as the lesser of (a) the drop in value and (b) your basis in the property (usually, your cost).
As an example, let’s say someonebought an antique vase for $500, which then rose in value to $3,000. It was then damaged in a fire, after which it was worth only $1,000. For tax purposes, the casualty loss is only $500. In some cases, appraisals will be needed to establish pre– and post-loss values. Often, the cost of cleaning up or making repairs to restore property to its original condition can be used as a measure of the decrease in the fair market value of the property; these repairs must be made and cannot be estimated.
There is a limitation to the loss, however. The loss figure must be reduced by three amounts. First, to the extent you are insured, you must reduce your loss by your reimbursement. Second, for each casualty, you must reduce your loss amount by $100. Note that this reduction is per “event” and not per item damaged. Therefore, if the storm knocked over a tree that damaged your car and home, you have three property losses (tree, car, and house) and only one reduction. Third, after combining all your losses under the above guidelines, you must reduce them by 10% of adjusted gross income (AGI).
It is important to note that not every casualty will result in a loss for tax purposes, but rather a casualty gain. For instance, suppose you purchased your home for $100,000 (your tax basis) and it has increased in value to $300,000. If your home was destroyed in the storm and you received close to $300,000 in insurance, a casualty gain of $200,000 would exist. In many cases, tax on a casualty gain can be avoided or deferred.
It is important that anyone who suffered a loss due to Hurricane Sandy not only contact their insurance agent, but also a tax advisor. There could be a way to recoup some of the loss caused by the devastation that the person never knew was there.
Andrew S. Lattimer, CPA, is a partner and Cynthia J. Teixeira, CPA,MS is a tax supervisor with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in West Hartford and Shelton, CT and Boston and Rockland, MA. The firm serves as business advisors for today’s leading companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization’s full potential. For more information about BlumShapiro, visit blumshapiro.com.