Many people in Hurricane Sandy’s wake have lost thousands of dollars worth of property, if not more. However, these people can expect some relief from the IRS. Victims of catastrophic loss are eligible for a tax deduction for property loss that was “sudden, unexpected, or unusual.” This deduction applies to all U.S. taxpayers, not just those affected by natural disasters like Hurricane Sandy.
Because catastrophic loss covers potentially any unexpected or unusual loss, a financial or tax law expert should be consulted to determine eligibility for the deduction. However, in most cases whether an event can be classified under the deduction is pretty obvious. Storms or fire damages are common reasons why a person may claim a catastrophe deduction. However, if you live in the desert and your home burns down because you were recklessly playing with with fire, it is less likely that you will be able to deduct fire damage.
The catastrophic loss deduction will not be useful if you do not itemize your deductions. Catastrophic loss deductions are also limited to amounts above 10% of your adjusted gross income (AGI). This means that if your AGI is approximately $100,000; you would have had to lose more than $10,100 in order to claim a deduction. The deduction also only counts for property loss not covered by insurance.
Finally, this deduction is not a tax credit, which can be used to reduce taxes dollar for dollar. The deduction only reduces the amount of taxable income, which is a used in calculating how much you owe.