Insurance Claims and Tax Deductions: A Primer
Insurance & Tax Deductions
Beyond the stress (and potential trauma) of an incident that leads to filing a property damage claim, no one likes to deal with the stress of dealing with insurance. Although we cannot help with the insurance end of things, we’ve put together this 101 on how to deal with casualties on your tax return. For starters you must first prove to the IRS that you are in fact the owner of the property. Also, you must notify the IRS of any insurance reimbursement you anticipate receiving with respect to your claim or monetary settlement from a pending lawsuit. Since the deduction only covers unrecoverable losses, you must deduct the aforementioned amount(s) from your tax deduction.
Actual loss
Generally speaking, the tax basis is equal to the amount you originally paid for the property. However the IRS will require you to use the smallest of the property’s tax basis to determine the deductible amount.
Deductible loss
After determining the actual loss, reduce that by $100. Note that the reduction is applied to each distinct casualty event, not each individual piece of property. After that, the total casualty loss for the year should be reduced by an amount equal to 10% of your adjusted gross income. The total is the amount you are able to claim on your tax return.
Tax time: what now?
There are two options: if your causality is the result of a federally declared disaster, you can use IRS form 4684 to claim your losses; if your loss was not in a federally declared disaster zone, you must be eligible to itemize your deductions. If your expenses exceed the standard deduction amount, you will augment your tax return with a Schedule A attachment.
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