Casualty Loss Reimbursements
If your property loss was covered by insurance, you must submit
a timely claim for reimbursement with the insurance company in order
to deduct any casualty losses for property damage. The exception
to this rule is that if your policy requires you to pay a deductible
amount, this amount counts as a loss even if you don't file a claim.
Once
you've determined the amount of your loss, you must subtract the value
of the insurance reimbursements you received, to arrive at your deductible
casualty loss. If the reimbursements are greater than your losses
as calculated under IRS rules, you may actually have a gain as a result
of the casualty.
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Tip If your home suffers a loss and you are
reimbursed on the basis of your home's appreciated value, but for
tax purposes you can only claim the original cost of the home as a
loss, you may experience a gain upon receiving the insurance money.
You can generally avoid paying tax on the gain if you purchase qualified
replacement property within two years. |
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Insurance payments are the most common form of reimbursement
for casualty losses, but you will also have to count any condemnation
awards, disaster relief grants, or cancellation of disaster relief
loans. However, if you receive money to help you recover from a disaster
that is not specifically earmarked for repair or replacement of damaged
property, it is not considered a reimbursement for tax loss purposes.
If
your insurance company pays you for living expenses because you have
to move out of your damaged home, these payments are not subtracted
from your casualty loss. However, you may have to declare some of
the payments as taxable income, if they exceed the actual amount of
the extra expenses you had.
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Example You had a fire in your apartment and
had to move out for a month and stay in a hotel. Your rent is normally
$500 per month, but the hotel cost $1,200. Your insurance company
paid $1,000 for living expenses. You don't have to subtract
any of the payment from your allowable casualty loss. The amount
by which your hotel bill exceeds your rent ($1,200 - $500 = $700)
is tax free. However the remaining $300 would have to be declared
as extra income on Line 21 of Form 1040, unless you can show that
your food, transportation, and other costs were $300 higher for the
month because of the damage to your home. |
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If, at the time your tax return is due, you haven't yet
received the final word from your insurance company on what your reimbursement
will be, you must take a stab at an approximation, and subtract that
amount. If it later turns out that you receive less than you expected,
you can deduct the difference as a casualty loss on the tax return
for the later year in which the insurance claim is finalized.
If
it turns out that you receive more than you expected, you will have
to include the excess amount in income in the year you receive it.
However, if any part of your original deduction did not reduce your
tax bill, you don't have to include that part of the reimbursement
in your income.
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Example In December of 2014, you suffered a
personal loss of $5,000 and expected to receive $3,000 from your insurance
company. However, due to the application of the $100-plus-10 percent
rule (discussed in the next section), you were unable to deduct any
of your loss in 2014. If, in 2014, you actually receive $5,000 from
the insurance company, you don't have to declare any of it as income,
because you declared no loss in 2014 and the payment does not exceed
your actual loss. |
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