For many living on the East Coast and in other recent disaster zones, the past year has been horrendous. But at least there's a tiny light at the end of the tunnel when it comes to your taxes: You may be eligible for the disaster tax deduction.
That's right, there's a tax break disaster victims may be able to claim, as Bankrate.com reminds us. It's a little-known tax break, but for those who have weathered the storms, it's a little piece of good news.
The first question people ask is what kind of disaster qualifies for the tax break. In general, once the president declares a disaster, the Internal Revenue Service sits up and takes notice.
You must itemize your return in order to use this deduction. What does that mean? When filing your tax return, you can either take the standard deduction or you can spend a little more time and deduct item-by-item. You can't take the disaster tax deduction unless you itemize.
You can deduct the losses you incurred in the disaster. Disaster-related damage to your property, car, or business is potentially deductible. But that doesn't include normal wear and tear, only damage from the disaster.
You can't deduct the amounts that your insurance covered. If your insurance covered the loss, you can't deduct it. You can only deduct the amounts that your insurance did not cover.
You can't deduct the whole amount. There are some tricky tax rules in effect here. First, you must reduce the amount you can claim by $100. Then, you have to reduce the total casualty loss by 10% of your adjusted gross income. In many cases, victims of a disaster find there isn't much to deduct anymore.
You need to file additional paperwork. In addition to taking the itemized deduction on your Form 1040, you also need to file a Form 4684. So, in all, this can be a more time consuming tax filing and may even require you to call an experienced tax lawyer to make sure you're doing it right.
It's not a total no-brainer to take the disaster tax deduction. For some, it will provide great amnesty and will give them a huge refund. To others, it's just not worth all the effort, when the refund will be minimal.