Tax Breaks for Natural Disasters

If claiming a loss on your tax return, you must include the FEMA disaster declaration number on Form 4684, Casualties and Thefts, attached to the return. The number can be found on the IRS’s disaster relief news releases.

You have to be able to itemize your deductions in order to claim property or casualty losses. To itemize, you should have more than the standard deduction. The standard deduction for married couples filing jointly for tax year 2022 is $25,900; for single taxpayers and married individuals filing separately, the standard deduction is $12,950. For heads of households, the standard deduction is $19,400.

You must subtract $100 from each casualty or theft event that occurred during the year after you’ve subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10 percent of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year.

Get relief for lost records

Calculating losses can seem impossible when records have been destroyed in a fire, flood or other disaster.

“I have clients who have literally lost everything. You see the before and after pictures, and the after picture looks like the moon. There’s nothing left,” says Pon.

If documents were destroyed, there are ways to reconstruct records, such as obtaining electronic copies of bank and credit card statements. The price you paid for your house is a public record. Most people remember which charities they donated to and can call the nonprofits to request documentation, notes Pon.

The IRS typically issues “safe harbor methods” for taxpayers to calculate losses after a disaster, according to Kaminski. Methods can include estimated repair cost, a licensed contractor’s estimate of the cost to restore the property, or the value from an appraisal. “The IRS is sympathetic about people losing all their records,” he says.

You also can obtain a free replacement copy of lost or damaged tax returns; the IRS waives the fee it normally charges.

But the bottom line is to keep good records and maintain copies you can access electronically or off-site from your home in case your residence is damaged or destroyed.

Amend a return to claim a loss in the prior year

Taxpayers who suffer uninsured or unreimbursed disaster-related losses can claim those losses on the tax return for the previous year, if they wish.

“This gives disaster victims additional flexibility,” says Smith, noting the loss may be more beneficial from a tax perspective in the previous year versus the current year. “Plus, if it’s helpful to you from, say, a cash-flow perspective, you have the opportunity of perhaps getting a refund sooner, rather than waiting to get the benefit when you file next year.”

Pon says it can be worth the time to assess which is the better year to file. “You want to run the numbers to see which is going to give you the bigger refund,” he says. “It depends which tax bracket you’re in, your tax situation. The same loss could have a different result in one year than the other.”

To get a refund quickly, it may be better to claim the loss on next year’s original return, especially if the disaster happened late in the calendar year, instead of amending a return you filed by April 15. “Original returns are typically processed much more quickly than amended returns,” says Smith.

Know what’s taxable and what’s not

Qualified disaster relief payments are generally tax-free. However, you can’t double-dip when claiming losses. “Don’t get greedy,” says Pon.

For example, you can’t deduct casualty losses or medical expenses if they were specifically reimbursed by disaster relief grants. Also, if you deducted the loss of your home and later received a disaster relief grant for the loss of the same residence, you may have to include part or all of the grant in your taxable income.

“A variety of disaster payments are tax-free, but any that cover property damage need to be subtracted when figuring any disaster loss deduction,” said Smith.

If the Red Cross or Salvation Army provides temporary shelter, food or clothing, that aid is not taxable, Pon notes. However, disaster unemployment benefits, like regular unemployment benefits, are taxable.

Seek assistance to understand the rules

Filing a return with losses from a disaster can be more complicated than preparing a normal return. “You have to dig,” says Kaminski. “You need to do your research and ask for help.”

Hire a professional preparer to help you navigate complex rules. If you can’t afford to hire someone, your state society of CPAs may offer volunteer help, Pon notes.