Natural Disasters and Their Tax Implications

This year has seen more than its share of natural disasters. In the last month Hurricanes Helene and Milton alone have caused billions of dollars of damage across much of the Southeastern United States. Other federally declared disasters this year include widespread flooding in Illinois, wildfires in New Mexico, and tropical storms in Pennsylvania and Georgia. Victims of these disasters may be eligible for tax relief.

A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual events such as a flood, hurricane, tornado, fire, or earthquake. To determine your deduction for a casualty loss, use the following steps.

1. Determine your adjusted basis in the property before the casualty.
2. Determine the decrease in fair market value of the property as a result of the casualty.
3. From the smaller of the amounts in steps 1 and 2, subtract any insurance reimbursement you received or expect to receive.

The calculated loss is reduced by $100, and the balance is deductible only to the extent it exceeds 10% of adjusted gross income. Casualty losses on personal property are reported on Form 4684, section A and must be taken as an itemized deduction.  For tax years 2018 through 2025, casualty losses are only deductible if the loss is attributable to a federally declared disaster area.

The rules for taking casualty losses on business property are less stringent. You need not itemize to deduct losses, and they do not have to be attributable to a federally declared disaster area. The $100 and 10% of AGI offsets do not apply.

Individuals can take the loss on the return for the year of the disaster or the year immediately preceding the disaster. For those who choose to amend their 2023 return, the due date for this purpose is six months after the normal filing date for 2024 returns, which would be October 15, 2025.

The IRS has extended deadlines for those affected by natural disasters in 2024. Taxpayers in the entire states of Alabama, Florida, Georgia, North Carolina and South Carolina, and parts of Virginia and Tennessee will have until May 1, 2025, to file their 2023 returns. For these taxpayers, May 1 will also be the deadline for filing their 2024 returns, business or individual, and paying any tax due. The May 1 deadline also applies to quarterly estimated tax payments normally due on January 15, 2025, and April 15,2025. Taxpayers can check the IRS website for additional information extension deadlines.