CASUALTY LOSSES

Unusual weather and other natural environmental conditions can impact you both physically and financially. The following articles include a brief overview of casualty losses and how they might impact your tax return, an emergency supplies checklist, and tips on how to prepare for an earthquake.

Casualty Losses Effects on Taxes

The following is a brief overview of casualty losses and how they might impact your tax return. The information provided is by no means complete; contact this office for further details.

Casualty Loss Definition - A casualty refers to the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
  • A sudden event is one that is swift, not gradual or progressive.

  • An unexpected event is one that is ordinarily unanticipated and unintended.

  • An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.
Disaster Losses - Disaster losses are casualty losses that occur in a geographical area that has been declared a disaster region by the President of the United States. Generally, any available tax deduction for a casualty loss must be taken on the return for the year in which it occurs. However, if the casualty occurs in a designated disaster region, the loss can be taken either on the loss year’s return or on the return for the year prior to the loss. The decision as to when to take the loss depends upon a number of factors and should be carefully analyzed in order to determine which year is most beneficial for the taxpayer. Factors to consider include: 
  • The tax brackets for each year - From purely a tax standpoint, each year should be carefully examined in order to determine which will provide the  greater overall tax benefit without wasting other tax benefits.

  • The need for immediate cash - The primary purpose of the special rules allowing the casualty loss to be claimed on the prior year’s return is to provide taxpayers access to a tax refund without needing to wait - often many months -to file their return for the year of the loss.

  • Self-Employment tax - Self-employed taxpayers will also need to consider whether to take a business casualty loss that affects inventory in the current or prior year since the loss can offset the self-employment tax as well as income taxes.

  • Whether the loss will be used up - If the casualty loss is not fully used up in the year in which it is first deducted, it can create a net operating loss (NOL). An NOL can be taken back to prior years or carried forward to future years and used as a deduction on carryback or carry-forward returns. If such an NOL is considered, care should be taken to analyze the benefit from the potential loss carryback versus carrying the loss forward.
Net Operating Loss - Generally, taxpayers may carry their net operating loss back 2 years and forward 20 years until it is used up. NOLs resulting from casualties may, by election, be carried back 3 years.

Determining the Loss - Generally, the deductible loss is the lesser of the cost or fair market value of each item lost or damaged in the casualty. Once the loss is determined for each individual item, those amounts are added together to determine the total loss for each separate casualty event. 

Business or Personal Casualty - Casualty losses are categorized as either business or personal casualty losses. Business losses are fully deductible without limitations, whereas personal casualty losses are first reduced by $100 for each event, after which the total of all of the events for the year is reduced by 10% of your annual income (AGI). In addition, for personal casualty losses, you must itemize your deductions in order to take advantage of the loss.

Insurance Reimbursement - Your casualty loss must be reduced by the amount of any insurance reimbursement. Generally, if you are insured for your loss and the insurance company offers you an amount that the insurance company deems to be the FMV of the item or items lost or damaged in the casualty, you will generally not have a casualty loss unless the combination of insurance loss limits and deductibles exceeds the personal loss limitations. 

Filing Relief - The IRS will generally provide filing relief for affected individuals and businesses within a Presidentially declared disaster zone, including extensions for filing tax returns, entity returns, information returns, and making deposits. The duration of these extensions will vary depending on the facts and circumstances of the disaster.

All workers assisting with relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are generally also eligible for relief. Watch for IRS announcements related to each event.

If you have incurred a casualty or disaster loss, please contact this office so that we may provide you with guidance related to claiming and documenting your loss.


Preparing Your Family For An Earthquake

When preparing for an earthquake, plan on having enough supplies to get you and your family through at least the first 72 hours. After a major earthquake, there's a good chance that traditional emergency response teams will be too busy to take care of you and your family. You need to prepare your home and neighborhood.

The Plan

  • Stock up on at least a three-day supply of food, water, clothes, medical supplies and other necessary equipment for everyone in your family. Make sure everyone knows where to find them. (See the information sheet on emergency supplies in this packet.)
  • Decide where and when to reunite with your family should you be apart when an earthquake happens.
  • Choose a person outside the immediate area to contact if family members are separated. Long-distance phone service will probably be restored sooner than local service. Do not use the phone immediately after an earthquake.
  • Know the policies of the school or daycare center your children attend. Make plans to have someone pick them up if you are unable to get to them.
  • If you have a family member who does not speak English, prepare an emergency card written in English indicating that person's identification, address and any special needs such as medication or allergies. Tell that person to keep the card with him/her at all times.
  • Conduct Earthquake Duck, Cover & Hold drills every six months with your family.
  • Know the safest place in each room because it will be difficult to move from one room to another during a quake.
  • Locate the shutoff valves for water, gas and electricity. Learn how to shut off the valves before a quake. If you have any questions, call your utility company.
  • Make copies of vital records and keep them in a safe deposit box in another city or state. Make sure your originals are stored safely.
  • Before a quake occurs, call your local Red Cross Chapter and Office of Emergency Services to find out about their plans for emergency shelters and temporary medical centers in case of such a disaster.
  • Establish all the possible ways to exit your house. Keep those areas clear.
  • Know the locations of the nearest fire and police stations.
  • Take photos and/or videos of your valuables. Make copies and keep them in another city or state or digitally in the cloud.
  • Include your babysitter and other household help in your plans.
  • Keep an extra pair of eyeglasses and house and car keys on hand.
  • Keep extra cash and change. If electricity is out, you will not be able to use an ATM.

 General Tips

  • Stay away from heavy furniture, appliances, large glass panes, shelves holding objects, and large decorative masonry, brick or plaster such as fireplaces.
  • Keep your hallway clear. It is usually one of the safest places to be during an earthquake.
  • Stay away from kitchens and garages, which tend to be the most dangerous places because of the many items kept there.

Download the State of California Earthquake Preparedness Checklist.

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