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The 2021 hurricane season is expected to be active.
Colorado State University is forecasting up to 17 named storms and expects eight to become hurricanes this season. And with an active hurricane season, you can expect many to experience damage to their homes and personal property.
If you experience a hurricane loss, the Internal Revenue Service (IRS) may offer tax relief. Here’s what you need to know to report a hurricane loss on your tax return.
What is considered a hurricane loss for tax purposes?
If your home or personal belongings are destroyed or damaged by a hurricane, you may be able to report a loss, known as a claim, on your tax return. A loss is the result of any property damage that is sudden, unusual or unexpected.
For example, a loss caused by a hurricane, earthquake or tornado would be considered a loss. However, a loss over time due to normal wear and tear, such as termite damage, would not be considered an accident loss.
For the 2018 to 2025 tax years, your hurricane loss must be due to a disaster reported by the federal government to be reported on your tax return. A federally declared disaster is authorized by the president to provide federal disaster assistance in a certain area.
How to determine the amount of your loss (or gain) due to the hurricane?
For property partially destroyed or for personal use, your hurricane loss amount is the lesser of these two amounts:
- Adjusted Base: You need to determine your adjusted base in your property before the hurricane. Typically, your adjusted basis is the amount you paid for the property. It increases over time for additions or improvements made and decreases by depreciation. If you acquired the property as a gift or as an inheritance, your base may differ. In this case, you may want to speak to a tax professional to determine your base.
- Decrease in fair market value: You must determine the decrease in fair market value (FMV) resulting from the loss. The IRS determines your FMV as the price at which you could sell your property to a willing buyer on the open market. For example, if the FMV of your property before the loss was $ 25,000 and because of the loss it decreases to $ 10,000, then the decrease in fair market value is $ 15,000.
After determining the amount of your loss, you will need to subtract any insurance or refunds you have received or are expecting for the property from the smaller amount to determine your loss.
Claiming a gain on reimbursement
In some cases, you may also need to report damage tax gain from a refund. If you receive a refund that is greater than the adjusted base of your property, you may realize a tax gain. You may have to pay taxes on the reportable gain. If this is the case, it is a good idea to speak to a tax professional for help.
How do you report your hurricane loss on your tax return?
Any loss due to a hurricane that occurred during the tax year is reported on Form 4864, Victims and Theft. This form will guide you through the amount you can claim.
The IRS requires that each loss incurred be reduced by $ 100 that occurred during the year. Then you need to add up all of your total losses for the year and reduce them by 10% of your adjusted gross income (AGI).
You must itemize your deductions on Form 1040, Schedule A to report your loss. Itemized deductions are certain eligible expenses that reduce your taxable income.
There are certain losses, where these rules may not apply. Talk to a tax professional to help you manage your losses.
When should you report your hurricane loss on your tax return?
Generally, you can claim your hurricane loss resulting from a disaster declared by the federal government in the year of the disaster or the year before the disaster. Reporting a loss in a previous year can lower your taxes for that year and generate a tax refund sooner.
If you choose to claim your loss from the previous year, you have six months after the due date of your original tax return for the year of the disaster. For example, you have until October 15, 2022 to modify your 2020 income tax return for a claim that occurred in 2021.
What if your records are destroyed?
One of the biggest challenges you may face after a hurricane is rebuilding your records. But documenting your damage is essential to claiming your loss on your tax return. The IRS provides many tools that you can use to help you rebuild your records.
Previous tax records
You can request free transcripts of your previous year’s tax returns and other tax records by visiting the IRS’s Get Transcript tool. You will need your social security number, date of birth, filing status, and mailing address to retrieve your information. You will also need to verify your identity by entering your personal information from an account number, such as a mortgage, home equity loan, credit card, or cell phone number. This tool allows you to view and download your transcripts.
You can also request your tax records by calling the IRS at (800) 908-9946 or by submitting Form 4506-T, Request for Transcript of a Tax Return. If you decide to send your request by mail, write the name of the disaster in red letters at the top of the form to speed up the process and waive all fees.
Document personal property
If you don’t have good records to prove the loss of personal property (or its value), you will need to identify the lost items. You can search photos of your phone taken before the hurricane, search the internet for cost estimates, and consider contacting your bank or credit card company for past receipts or statements.
The IRS also publishes a workbook that provides a step-by-step guide to help you identify personal property damaged by a hurricane. This filing cabinet allows you to record items in every room in your home. It also provides columns for you to list its cost, insurance, fair market value to help you determine the value of your loss.
If you need help claiming your hurricane loss, you can visit the IRS webpage for people affected by natural disasters, such as hurricane loss.