CARL WATTS & ASSOCIATES

October 19, 2015

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The hurricane season is almost over this year, but floods, wildfires, earthquakes may, unfortunately, happen any time of the year. It is common knowledge that, when such an event occurs, the government can declare a state of emergency, and that this decision determines the legal and operational resources available to respond to an emergency and has implications for governments, the private sector, and the public.


A federally declared disaster usually triggers a system of financial and other assistance by the federal government to state and local governments. In line with all this, you may have heard about the National Disaster Relief Act which provided a broad package of tax benefits for anyone who was affected by a federally declared disaster, but only for victims of disasters that occurred after Dec. 31, 2007, and before Jan. 1, 2010.

For later years, IRS Publication 547 explains the tax treatment of casualties, thefts, and losses on deposits, with some special information on when you can deduct your loss, how to claim your loss, how to treat your home in a disaster area, and what tax deadlines may be postponed if you are a victim in a federally declared disaster area.

First of all, a federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. It includes a major disaster or emergency declaration under the Act.

A list of the areas warranting public or individual assistance (or both) under the Act for is available at the Federal Emergency Management Agency (FEMA) website at www.fema.gov/news/disasters.fema.

As a general rule, you must deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster area, you may have a choice of when to deduct the loss. You can choose to deduct the loss on your return for the year the loss occurred or on an amended return for the immediately preceding tax year. Claiming a disaster loss on the prior year's return may result in a lower tax for that year, often producing a refund.

If you have inventory loss from a disaster in an area designated by FEMA for public or individual assistance (or both), you may choose to deduct the loss on your return or amended return for the immediately preceding year. However, decrease your opening inventory for the year of the loss so that the loss will not be reported again in inventories.


If your home is located in a federally declared disaster area, you can postpone reporting the gain if you spend the reimbursement to repair or replace your home. Special rules apply to replacement property related to the damage or destruction of your main home (or its contents) if located in these areas.

If your home is located in a federally declared disaster area, your state or local government may order you to tear it down or move it because it is no longer safe to live in because of the disaster. If this happens, treat the loss in value as a casualty loss from a disaster. Your state or local government must issue the order for you to tear down or move the home within 120 days after the area is declared a disaster area. Figure your loss in the same way as for casualty losses of personal-use property.

If you choose to deduct your loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened, include a statement saying that you are making that choice. The statement can be made on the return or can be filed with the return. The statement should specify the date or dates of the disaster and the city, town, county, and state where the damaged or destroyed property was located at the time of the disaster.

You must make this choice to take your casualty loss for the disaster in the preceding year by the later of the following dates:


  • The due date (without extensions) for filing your income tax return for the tax year in which the disaster actually occurred.
  • The due date (with extensions) for filing the return for the preceding tax year.

You must figure the loss under the usual rules for casualty losses, as if it occurred in the year preceding the disaster.

You figure the amount of your loss using the following steps:

  • Determine your adjusted basis in the property before the casualty. For property you buy, your basis is usually its cost to you. For property you acquire in some other way, such as inheriting it or getting it as a gift, you must figure your basis in another way.
Tax Relief for
National Disasters

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  • Determine the decrease in fair market value, or FMV, of the property as a result of the casualty. FMV is the price for which you could sell your property to a willing buyer. The decrease in FMV is the difference between the property's FMV immediately before and immediately after the casualty.
  • Subtract any insurance or other reimbursement you received or expect to receive from the smaller of those two amounts.

After you have figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It does not matter how many pieces of property are involved in an event.

You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10 percent of your adjusted gross income.

Do not consider the loss of future profits or income due to the casualty as you figure your loss.

If you have already filed your return for the preceding year, you can claim a disaster loss against that year's income by filing an amended return. Individuals file an amended return on Form 1040X.

You should adjust your deductions on Form 1040X. The Instructions for Form 1040X show how to do this. Explain the reasons for your adjustment and attach Form 4684 to show how you figured your loss.


If the damaged or destroyed property was nonbusiness property or employee property and you did not itemize your deductions on your original return, you must first determine whether the casualty loss deduction now makes it advantageous for you to itemize. It is advantageous to itemize if the total of the casualty loss deduction and any other itemized deductions is more than your standard deduction. If you itemize, attach Schedule A (Form 1040) or Form 1040NR, Schedule A, and Form 4684 to your amended return. Fill out Form 1040X to refigure your tax to find your refund.

Qualified disaster relief payments are not included in the income of individuals to the extent any expenses compensated by these payments are not otherwise compensated for by insurance or other reimbursement. These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). No withholding applies to these payments.

Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses:

  • Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster.
  • Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. (A personal residence can be a rented residence or one you own.)
  • Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster.

Qualified disaster relief payments also include amounts paid to individuals affected by the disaster by a federal, state, or local government in connection with a federally declared disaster. These payments must be made from a governmental fund, be based on individual or family needs, and not be compensation for services.


Payments to businesses generally do not qualify, and some of the casualty loss rules for business or income property are different than the rules for property held for personal use.

Even though our goal is to keep you well informed, especially tax wise, we wish that you may never have to experience such an extreme situation. But, no matter what the case may be, remember that help from a tax professional is always the best option.