Tropical Storm Isaias: A Guide to Deducting Casualty Losses

On August 7th, 2020 the Federal Emergency Management Agency (FEMA) declared the entire state of Connecticut to be a disaster area as a result of the storm. For those thinking “No sugar Sherlock! Tell me something I don’t know, Mr. Holmes”, please read on. If you were affected by Tropical Storm Isaias you may be able to turn those “2 years sitting in the freezer and now they’re gone forever” Eggo waffles you lost into a legit tax deduction under Section 165(i) of the tax code.

Section 165(i) Overview

Generally, under IRC Section 165 (i), “there shall be allowed as a deduction any loss sustained during the taxable year and not compensated 

for by insurance or otherwise.” In a Federally Declared disaster area, as Connecticut was recently designated, the loss may be claimed in the year of or immediately preceding the year the loss occurred. For Tropical Storm Isaias, tax years 2019 and 2020 are in play.

How Do I Figure Out the Amount of My Loss?

In its simplest form, the amount of loss is calculated by taking the following steps:

  1. Determine adjusted basis in the entire property before the casualty
  2. Determine the decrease in fair market value- appraisal or cost of repairs method can be used
  3. Subtract insurance and/or any other compensation received or expected to be received from the smaller of the amounts in steps 1 & 2. (It will most likely be the amount from step 2)

How Much Can I Deduct?

Unreimbursed expenses in-excess of $500. Under usual circumstances, casualty losses are subject to a 10% AGI limit but this rule does not apply to federally declared disaster areas. Furthermore, a taxpayer does not need to itemize deductions in order to claim the deduction.

EXAMPLE: Your total loss was $40,000 and the insurance proceeds received were $38,000.

Keys to Claiming Deduction

  1. File a timely insurance claim
  2. Keep track of all expenses associated with restoring the property to condition before the casualty
  3. Beware of casualty gains resulting from an involuntary conversion of property
  4. Contact your tax professional. Form 4684 must be filed with the tax return
  5. Eat those thawed out Eggos raw! There is no such thing as a bad waffle

Contact Us

For assistance assessing your loss please contact an Innovative CPA Group tax professional at 203-489-0612 or contact us online.

By:Austin McAnneny