If you have recently been victimized by a natural disaster, at least you may find a silver tax lining.
Strategy: Obtain fast tax relief. If you qualify, you can elect to deduct a casualty loss suffered early in 2017 on the 2016 return to be filed by April 18, 2017 (or by Oct. 16 if you extend the return).
Of course, you’re still subject to the general rules for personal casualty losses.
Here’s the whole story: You can potentially deduct a casualty loss for damage caused by an event that is “sudden, unexpected or unusual.” This includes natural disasters like tornadoes, hurricanes, fires and floods. After insurance proceeds relating to the event are subtracted, two limits are applied to personal casualty losses:
- The deductible amount is reduced by $100 for each casualty or theft event.
- The remainder is deductible only to the extent it exceeds 10% of your adjusted gross income (AGI).
For instance, if your unreimbursed loss is $15,000 and your AGI is $100,000, the deduction is limited to $4,900.
Normally, you must deduct the loss in the year that the casualty event occurs. However, if the loss occurs in a federally declared disaster area, you can elect to deduct that loss on the tax return for the year immediately preceding the tax year in which the disaster happened.
Tip: Depending on the timing, you might file an amended return for the year before the loss occurs.