Table of Contents
- Casualty
- Theft
- Loss on Deposits
- Proof of Loss
- Figuring a Loss
- Deduction Limits
- Figuring a Gain
- When To Report Gains and Losses
- Disaster Area Losses
- Disaster loss to inventory.
- Main home in disaster area.
- Unsafe home.
- Time limit for making choice.
- Revoking your choice.
- Figuring the loss deduction.
- How to report the loss on Form 1040X.
- Records.
- Need a copy of your tax return for the preceding year?
- Postponed Tax Deadlines
- Contacting the Federal Emergency Management Agency (FEMA)
- How To Report Gains and Losses
- How To Get Tax Help
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
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A sudden event is one that is swift, not gradual or progressive.
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An unexpected event is one that is ordinarily unanticipated and unintended.
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An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.
Generally, casualty losses are deductible during the taxable year that the loss occurred. See Table 3, later.
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Car accidents (but see Nondeductible losses , next, for exceptions).
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Earthquakes.
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Fires (but see Nondeductible losses , next, for exceptions).
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Floods.
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Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later.
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Mine cave-ins.
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Shipwrecks.
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Sonic booms.
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Storms, including hurricanes and tornadoes.
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Terrorist attacks.
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Vandalism.
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Volcanic eruptions.
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Accidentally breaking articles such as glassware or china under normal conditions.
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A family pet (explained below).
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A fire if you willfully set it, or pay someone else to set it.
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A car accident if your willful negligence or willful act caused it. The same is true if the willful act or willful negligence of someone acting for you caused the accident.
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Progressive deterioration (explained below). However, see Special Procedure for Damage From Corrosive Drywall , later.
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The steady weakening of a building due to normal wind and weather conditions.
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The deterioration and damage to a water heater that bursts. However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty.
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Most losses of property caused by droughts. To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit.
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Termite or moth damage.
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The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss.
Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. For example, amounts you paid for repairs in 2012 are deductible on your 2012 tax return and amounts you paid for repairs in 2011 are deductible on your 2011 tax return.
Note.
If you paid for any repairs before 2012 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U.S. Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. Form 4684 for the appropriate year can be found at IRS.gov. Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later.
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The current cost to replace the original appliance, or
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The basis of the original appliance (generally its cost).
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If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8.
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If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8.
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The loss is properly deductible in the tax year you claimed it and not in some other year. See When To Report Gains and Losses , later.
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The amount of the claimed loss. See Proof of Loss , later.
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No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. See When To Report Gains and Losses , later.
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. You do not need to show a conviction for theft.
Theft includes the taking of money or property by the following means.
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Blackmail.
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Burglary.
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Embezzlement.
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Extortion.
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Kidnapping for ransom.
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Larceny.
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Robbery.
The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
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Revenue Ruling 2009-9, 2009-14 I.R.B. 735 (available at www.irs.gov/irb/2009-14_IRB/ar07.html).
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Revenue Procedure 2009-20, 2009-14 I.R.B. 749 (available at www.irs.gov/irb/2009-14_IRB/ar11.html).
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Revenue Procedure 2011-58, 2011-50 I.R.B. 847 (available at www.irs.gov/irb/2011-50_IRB/ar11.html).
A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. If you incurred this type of loss, you can choose one of the following ways to deduct the loss.
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As a casualty loss.
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As an ordinary loss.
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As a nonbusiness bad debt.
To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. You also must be able to support the amount you take as a deduction.
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The type of casualty (car accident, fire, storm, etc.) and when it occurred.
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That the loss was a direct result of the casualty.
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That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage.
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Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
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When you discovered that your property was missing.
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That your property was stolen.
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That you were the owner of the property.
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Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
To determine your deduction for a casualty or theft loss, you must first figure your loss.
IF you choose to report the loss as a(n)... | THEN report it on... | |
casualty loss | Form 4684 and Schedule A (Form 1040). |
|
ordinary loss | Schedule A (Form 1040). | |
nonbusiness bad debt | Form 8949 and Schedule D (Form 1040). |
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Determine your adjusted basis in the property before the casualty or theft.
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Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft.
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From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive.
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The decrease in FMV of the entire property.
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The adjusted basis of the entire property.
Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts.
The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft.
To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. However, other measures also can be used to establish certain decreases. See Appraisal and Cost of cleaning up or making repairs , next.
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The appraiser's familiarity with your property before and after the casualty or theft.
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The appraiser's knowledge of sales of comparable property in the area.
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The appraiser's knowledge of conditions in the area of the casualty.
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The appraiser's method of appraisal.
You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. For more information on disasters, see Disaster Area Losses later.
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The repairs are actually made.
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The repairs are necessary to bring the property back to its condition before the casualty.
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The amount spent for repairs is not excessive.
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The repairs take care of the damage only.
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The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty.
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Removing destroyed or damaged trees and shrubs, minus any salvage you receive.
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Pruning and other measures taken to preserve damaged trees and shrubs.
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Replanting necessary to restore the property to its approximate value before the casualty.
You generally should not consider the following items when attempting to establish the decrease in FMV of your property.
Example.
You bought a new chair 4 years ago for $300. In April, a fire destroyed the chair. You estimate that it would cost $500 to replace it. If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. The chair was not insured. Your loss is $100, the FMV of the chair before the fire. It is not $500, the replacement cost.
The measure of your investment in the property you own is its basis. For property you buy, your basis is usually its cost to you. For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010.
If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. You do not have a casualty or theft loss to the extent you are reimbursed.
If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. You must reduce your loss even if you do not receive payment until a later tax year. See Reimbursement Received After Deducting Loss , later.
The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule.
Example.
You have a car insurance policy with a $1,000 deductible. Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible.
The most common type of reimbursement is an insurance payment for your stolen or damaged property. Other types of reimbursements are discussed next. Also see the Instructions for Form 4684.
Example.
Your home was extensively damaged by a tornado. Your loss after reimbursement from your insurance company was $10,000. Your employer set up a disaster relief fund for its employees. Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. You received $4,000 from the fund and spent the entire amount on repairs to your home. In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. Your casualty loss before applying the deduction limits (discussed later) is $6,000.
Example.
Your home was damaged by a hurricane. Relatives and neighbors made cash gifts to you that were excludable from your income. You used part of the cash gifts to pay for repairs to your home. There were no limits or restrictions on how you could use the cash gifts. It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home.
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You lose the use of your main home because of a casualty.
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Government authorities do not allow you access to your main home because of a casualty or threat of one.
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Renting suitable housing.
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Transportation.
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Food.
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Utilities.
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Miscellaneous services.
Example.
As a result of a fire, you vacated your apartment for a month and moved to a motel. You normally pay $525 a month for rent. None was charged for the month the apartment was vacated. Your motel rent for this month was $1,200. You normally pay $200 a month for food. Your food expenses for the month you lived in the motel were $400. You received $1,100 from your insurance company to cover your living expenses. You determine the payment you must include in income as follows.
1) | Insurance payment for living expenses | $1,100 | |
2) | Actual expenses during the month you are unable to use your home because of the fire | $1,600 | |
3) | Normal living expenses | 725 | |
4) | Temporary increase in living expenses: Subtract line 3 from line 2 |
875 | |
5) | Amount of payment includible in income: Subtract line 4 from line 1 | $ 225 |
Example.
Your main home was destroyed by a tornado in August 2010. You regained use of your home in November 2011. The insurance payments you received in 2010 and 2011 were $1,500 more than the temporary increase in your living expenses during those years. You include this amount in income on your 2011 Form 1040. If, in 2012, you receive further payments to cover the living expenses you had in 2010 and 2011, you must include those payments in income on your 2012 Form 1040.
$100 Rule | 10% Rule | 2% Rule | ||||
General Application | You must reduce each casualty or theft loss by $100 when figuring your deduction. Apply this rule to personal-use property after you have figured the amount of your loss. | You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). | You must reduce your total casualty or theft loss by 2% of your adjusted gross income. Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. | |||
Single Event | Apply this rule only once, even if many pieces of property are affected. | Apply this rule only once, even if many pieces of property are affected. | Apply this rule only once, even if many pieces of property are affected. | |||
More Than One Event | Apply to the loss from each event. | Apply to the total of all your losses from all events. | Apply to the total of all your losses from all events. | |||
More Than One Person— With Loss From the Same Event (other than a married couple filing jointly) |
Apply separately to each person. | Apply separately to each person. | Apply separately to each person. | |||
Married Couple— With Loss From the Same Event |
Filing Joint Return |
Apply as if you were one person. | Apply as if you were one person. | Apply as if you were one person. | ||
Filing Separate Return |
Apply separately to each spouse. | Apply separately to each spouse. | Apply separately to each spouse. | |||
More Than One Owner (other than a married couple filing jointly) |
Apply separately to each owner of jointly owned property. | Apply separately to each owner of jointly owned property. | Apply separately to each owner of jointly owned property. |
If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. This section explains the adjustment you may have to make.
Example.
Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2011. The accident was due to the negligence of the other driver. At the end of 2011, there was a reasonable prospect that the owner of the other car would reimburse you in full. You did not have a deductible loss in 2011.
In January 2012, the court awards you a judgment of $2,000. However, in July it becomes apparent that you will be unable to collect any amount from the other driver. Since this is your only casualty or theft loss, you can deduct the loss in 2012 that is figured by applying the deduction limits (discussed later).
Example.
In 2011, a hurricane destroyed your motorboat. Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. You did not itemize deductions on your 2011 return, so you could not deduct the loss. When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. This is true even if it is for the full $3,000 because you did not deduct the loss on your 2011 return. The loss did not reduce your tax.
Example.
In December 2012, you had a collision while driving your personal car. Repairs to the car cost $950. You had $100 deductible collision insurance. Your insurance company agreed to reimburse you for the rest of the damage. Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2012.
Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. When you receive the $850 from the insurance company in 2013, do not report it as income.
After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct.
The deduction for casualty and theft losses of employee property and personal-use property is limited. A loss on employee property is subject to the 2% rule, discussed next. With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. The 2%, $100, and 10% rules are also summarized in Table 2 .
Losses on business property (other than employee property) and income-producing property are not subject to these rules. However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. See the instructions for Form 4684, Section B. If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions.
The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. Employee property is property used in performing services as an employee.
After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. This reduction applies to each total casualty or theft loss. It does not matter how many pieces of property are involved in an event. Only a single $100 reduction applies.
Example.
You have $750 deductible collision insurance on your car. The car is damaged in a collision. The insurance company pays you for the damage minus the $750 deductible. The amount of the casualty loss is based solely on the deductible. The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible.
Example 1.
A thunderstorm destroyed your pleasure boat. You also lost some boating equipment in the storm. Your loss was $5,000 on the boat and $1,200 on the equipment. Your insurance company reimbursed you $4,500 for the damage to your boat. You had no insurance coverage on the equipment. Your casualty loss is from a single event and the $100 rule applies once. Figure your loss before applying the 10% rule (discussed later) as follows.
Boat | Equipment | ||
1. | Loss | $5,000 | $1,200 |
2. | Subtract insurance | 4,500 | -0- |
3. | Loss after reimbursement | $ 500 | $1,200 |
4. | Total loss | $1,700 | |
5. | Subtract $100 | 100 | |
6. | Loss before 10% rule | $1,600 |
Example.
Your family car was damaged in an accident in January. Your loss after the insurance reimbursement was $75. In February, your car was damaged in another accident. This time your loss after the insurance reimbursement was $90. Apply the $100 rule to each separate casualty loss. Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents.
You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Apply this rule after you reduce each loss by $100. For more information, see the Form 4684 instructions. If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion.
Example.
In June, you discovered that your house had been burglarized. Your loss after insurance reimbursement was $2,000. Your adjusted gross income for the year you discovered the theft is $29,500. Figure your theft loss as follows.
1. | Loss after insurance | $2,000 |
2. | Subtract $100 | 100 |
3. | Loss after $100 rule | $1,900 |
4. | Subtract 10% of $29,500 AGI | $2,950 |
5. | Theft loss deduction | $-0- |
You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950).
Example.
In March, you had a car accident that totally destroyed your car. You did not have collision insurance on your car, so you did not receive any insurance reimbursement. Your loss on the car was $1,800. In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. Your loss on the basement items after reimbursement was $2,100. Your adjusted gross income for the year that the accident and fire occurred is $25,000. You figure your casualty loss deduction as follows.
Car | Basement | ||
1. | Loss | $1,800 | $2,100 |
2. | Subtract $100 per incident | 100 | 100 |
3. | Loss after $100 rule | $1,700 | $2,000 |
4. | Total loss | $3,700 | |
5. | Subtract 10% of $25,000 AGI | 2,500 | |
6. | Casualty loss deduction | $ 1,200 |
Casualty or theft gains do not include gains you choose to postpone. See Postponement of Gain, later.
Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. However, a special rule applies to real property you own for personal use.
Example 1.
In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. (Your land was not damaged.) This was your only casualty or theft loss for the year. The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). The FMV immediately after the fire was $35,000 (value of the land). You collected $130,000 from the insurance company. Your adjusted gross income for the year the fire occurred is $80,000. Your deduction for the casualty loss is $6,700, figured in the following manner.
1. | Adjusted basis of the entire property (cost in this example) | $144,800 |
2. | FMV of entire property before fire |
$180,000 |
3. | FMV of entire property after fire | 35,000 |
4. | Decrease in FMV of entire property (line 2 − line 3) | $145,000 |
5. | Loss (smaller of line 1 or line 4) | $144,800 |
6. | Subtract insurance | 130,000 |
7. | Loss after reimbursement | $14,800 |
8. | Subtract $100 | 100 |
9. | Loss after $100 rule | $14,700 |
10. | Subtract 10% of $80,000 AGI | 8,000 |
11. | Casualty loss deduction | $ 6,700 |
Example 2.
You bought your home a few years ago. You paid $150,000 ($10,000 for the land and $140,000 for the house). You also spent an additional $2,000 for landscaping. This year a fire destroyed your home. The fire also damaged the shrubbery and trees in your yard. The fire was your only casualty or theft loss this year. Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. Shortly after the fire, the insurance company paid you $95,000 for the loss. Your adjusted gross income for this year is $70,000. You figure your casualty loss deduction as follows.
1. | Adjusted basis of the entire property (cost of land, building, and landscaping) | $152,000 |
2. | FMV of entire property before fire |
$175,000 |
3. | FMV of entire property after fire | 50,000 |
4. | Decrease in FMV of entire property (line 2 − line 3) | $125,000 |
5. | Loss (smaller of line 1 or line 4) | $125,000 |
6. | Subtract insurance | 95,000 |
7. | Loss after reimbursement | $30,000 |
8. | Subtract $100 | 100 |
9. | Loss after $100 rule | $29,900 |
10. | Subtract 10% of $70,000 AGI | 7,000 |
11. | Casualty loss deduction | $ 22,900 |
Example 1.
In August, a storm destroyed your pleasure boat, which cost $18,500. This was your only casualty or theft loss for the year. Its FMV immediately before the storm was $17,000. You had no insurance, but were able to salvage the motor of the boat and sell it for $200. Your adjusted gross income for the year the casualty occurred is $70,000.
Although the motor was sold separately, it is part of the boat and not a separate item of property. You figure your casualty loss deduction as follows.
1. | Adjusted basis (cost in this example) | $18,500 |
2. | FMV before storm | $17,000 |
3. | FMV after storm | 200 |
4. | Decrease in FMV (line 2 − line 3) |
$16,800 |
5. | Loss (smaller of line 1 or line 4) | $16,800 |
6. | Subtract insurance | -0- |
7. | Loss after reimbursement | $16,800 |
8. | Subtract $100 | 100 |
9. | Loss after $100 rule | $16,700 |
10. | Subtract 10% of $70,000 AGI | 7,000 |
11. | Casualty loss deduction | $ 9,700 |
Example 2.
In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. You had bought the car for $30,000. The FMV of the car just before the accident was $17,500. Its FMV just after the accident was $180 (scrap value). Your insurance company reimbursed you $16,000.
Your watch was not insured. You had purchased it for $250. Its FMV just before the accident was $500. Your adjusted gross income for the year the accident occurred is $97,000. Your casualty loss deduction is zero, figured as follows.
Car | Watch | ||
1. | Adjusted basis (cost) | $30,000 | $250 |
2. | FMV before accident | $17,500 | $500 |
3. | FMV after accident | 180 | -0- |
4. | Decrease in FMV (line 2 − line 3) | $17,320 | $500 |
5. | Loss (smaller of line 1 or line 4) | $17,320 | $250 |
6. | Subtract insurance | 16,000 | -0- |
7. | Loss after reimbursement | $1,320 | $250 |
8. | Total loss | $1,570 | |
9. | Subtract $100 | 100 | |
10. | Loss after $100 rule | $1,470 | |
11. | Subtract 10% of $97,000 AGI | 9,700 | |
12. | Casualty loss deduction | $-0- |
Example.
In July, a hurricane damaged your home, which cost you $164,000 including land. The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. Your household furnishings were also damaged. You separately figured the loss on each damaged household item and arrived at a total loss of $600.
You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. Your adjusted gross income for the year the hurricane occurred is $65,000. You figure your casualty loss deduction from the hurricane in the following manner.
1. | Adjusted basis of real property (cost in this example) | $164,000 |
2. | FMV of real property before hurricane |
$170,000 |
3. | FMV of real property after hurricane | 100,000 |
4. | Decrease in FMV of real property (line 2 − line 3) | $70,000 |
5. | Loss on real property (smaller of line 1 or line 4) | $70,000 |
6. | Subtract insurance | 50,000 |
7. | Loss on real property after reimbursement | $20,000 |
8. | Loss on furnishings | $600 |
9. | Subtract insurance | -0- |
10. | Loss on furnishings after reimbursement | $600 |
11. | Total loss (line 7 plus line 10) | $20,600 |
12. | Subtract $100 | 100 |
13. | Loss after $100 rule | $20,500 |
14. | Subtract 10% of $65,000 AGI | 6,500 |
15. | Casualty loss deduction | $ 14,000 |
Example.
You own a building that you constructed on leased land. You use half of the building for your business and you live in the other half. The cost of the building was $400,000. You made no further improvements or additions to it.
A flood in March damaged the entire building. The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. Your insurance company reimbursed you $40,000 for the flood damage. Depreciation on the business part of the building before the flood totaled $24,000. Your adjusted gross income for the year the flood occurred is $125,000.
You have a deductible business casualty loss of $10,000. You do not have a deductible personal casualty loss because of the 10% rule. You figure your loss as follows.
Business | Personal | |||
Part | Part | |||
1. | Cost (total $400,000) | $200,000 | $200,000 | |
2. | Subtract depreciation | 24,000 | -0- | |
3. | Adjusted basis | $176,000 | $200,000 | |
4. | FMV before flood (total $380,000) | $190,000 | $190,000 | |
5. | FMV after flood (total $320,000) | 160,000 | 160,000 | |
6. | Decrease in FMV (line 4 − line 5) |
$30,000 | $30,000 | |
7. | Loss (smaller of line 3 or line 6) | $30,000 | $30,000 | |
8. | Subtract insurance | 20,000 | 20,000 | |
9. | Loss after reimbursement | $10,000 | $10,000 | |
10. | Subtract $100 on personal-use property | -0- | 100 | |
11. | Loss after $100 rule | $10,000 | $9,900 | |
12. | Subtract 10% of $125,000 AGI on personal-use property | -0- | 12,500 | |
13. | Deductible business loss | $10,000 | ||
14. | Deductible personal loss | $ -0- |
If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Your gain is figured as follows.
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The amount you receive (discussed next), minus
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Your adjusted basis in the property at the time of the casualty or theft. See Adjusted Basis , earlier, for information on adjusted basis.
Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain.
Example.
A hurricane destroyed your personal residence and the insurance company awarded you $145,000. You received $140,000 in cash. The remaining $5,000 was paid directly to the holder of a mortgage on the property. The amount you received includes the $5,000 reimbursement paid on the mortgage.
Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. Your basis in the new property is generally the same as your adjusted basis in the property it replaces.
You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. See Controlling interest in a corporation , later.
If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property.
To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement.
Example.
In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. You made no further improvements or additions to it. When a storm destroyed the cottage this January, the cottage was worth $250,000. You received $146,000 from the insurance company in March. You had a gain of $128,000 ($146,000 − $18,000).
You spent $144,000 to rebuild the cottage. Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income.
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C corporations.
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Partnerships in which more than 50% of the capital or profits interest is owned by C corporations.
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All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000.
You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. Property you acquire as a gift or inheritance does not qualify.
You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. If you spend the money you receive from the insurance company for other purposes, and borrow money to buy replacement property, you can still postpone reporting the gain if you meet the other requirements.
Example.
Your home was destroyed by fire and you invested the insurance proceeds in a grocery store. Your replacement property is not similar or related in service or use to the destroyed property. To be similar or related in service or use, your replacement property must also be used by you as your home.
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Whether the properties are of similar service to you.
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The nature of the business risks connected with the properties.
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What the properties demand of you in the way of management, service, and relations to your tenants.
Example.
You owned land and a building you rented to a manufacturing company. The building was destroyed by fire. During the replacement period, you had a new building constructed. You rented out the new building for use as a wholesale grocery warehouse. Because the replacement property is also rental property, the two properties are considered similar or related in service or use if there is a similarity in all of the following areas.
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Your management activities.
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The amount and kind of services you provide to your tenants.
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The nature of your business risks connected with the properties.
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Property that is similar or related in service or use to the destroyed or stolen property.
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Depreciable property not reduced in (1).
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All other property.
Example.
A fire destroyed your rental home that you never lived in. The insurance company reimbursed you $67,000 for the property, which had an adjusted basis of $62,000. You had a gain of $5,000 from the casualty. If you have another rental home constructed for $110,000 within the replacement period, you can postpone reporting the gain. You will have reinvested all the reimbursement (including your entire gain) in the new rental home. Your basis for the new rental home will be $105,000 ($110,000 cost − $5,000 postponed gain).
To postpone reporting your gain, you must buy replacement property within a specified period of time. This is the replacement period.
The replacement period begins on the date your property was damaged, destroyed, or stolen.
The replacement period ends 2 years after the close of the first tax year in which any part of your gain is realized.
Example.
You are a calendar year taxpayer. While you were on vacation, a valuable piece of antique furniture that cost $2,200 was stolen from your home. You discovered the theft when you returned home on August 10, 2012. Your insurance company investigated the theft and did not settle your claim until January 4, 2013, when they paid you $3,000. You first realized a gain from the reimbursement for the theft during 2013, so you have until December 31, 2015, to replace the property.
Example.
You are a calendar year taxpayer. A hurricane destroyed your home in September 2012. In December 2012, the insurance company paid you $3,000 more than the adjusted basis of your home. The area in which your home is located is not a federally declared disaster area. You first realized a gain from the reimbursement for the casualty in 2012, so you have until December 31, 2014, to replace the property. If your home had been in a federally declared disaster area, you would have until December 31, 2016, to replace the property.
You postpone reporting your gain from a casualty or theft by reporting your choice on your tax return for the year you have the gain. You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain.
If a partnership or a corporation owns the stolen or destroyed property, only the partnership or corporation can choose to postpone reporting the gain.
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The date and details of the casualty or theft.
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The insurance or other reimbursement you received from the casualty or theft.
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How you figured the gain.
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The replacement property.
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The postponed gain.
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The basis adjustment that reflects the postponed gain.
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Any gain you are reporting as income.
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You do not acquire replacement property within the required replacement period plus extensions. On this amended return, you must report the gain and pay any additional tax due.
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You acquire replacement property within the required replacement period plus extensions, but at a cost less than the amount you receive for the casualty or theft. On this amended return, you must report the portion of the gain that cannot be postponed and pay any additional tax due.
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You replaced the property.
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You do not intend to replace the property.
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You did not replace the property within the replacement period.
Example.
Your property was stolen in 2011. Your insurance company reimbursed you $10,000, of which $5,000 was a gain. You reported the $5,000 gain on your return for 2011 (the year you realized the gain) and paid the tax due. In 2012 you bought replacement property. Your replacement property cost $9,000. Since you reinvested all but $1,000 of your reimbursement, you can now postpone reporting $4,000 ($5,000 − $1,000) of your gain.
To postpone reporting your gain, file an amended return for 2011 using Form 1040X. You should attach an explanation showing that you previously reported the entire gain from the theft but you now want to report only the part of the gain ($1,000) equal to the part of the reimbursement not spent for replacement property.
This section discusses the special rules that apply to federally declared disaster area losses. It contains information on when you can deduct your loss, how to claim your loss, how to treat your home in a disaster area, and what tax deadlines may be postponed. It also lists Federal Emergency Management Agency (FEMA) phone numbers. (See Contacting the Federal Emergency Management Agency (FEMA) , later.)
A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. It includes a major disaster or emergency declaration under the Act.
A list of the areas warranting public or individual assistance (or both) under the Act for 2012 is available at the Federal Emergency Management Agency (FEMA) web site at www.fema.gov/news/disasters.fema.
Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund.
If you do not choose to deduct your loss on your return for the earlier year, deduct it on your return for the year in which the disaster occurred.
Example.
You are a calendar year taxpayer. A flood damaged your home this June. The flood damaged or destroyed a considerable amount of property in your town. Your town is located in an area designated by FEMA for public or individual assistance (or both). You can choose to deduct the flood loss on your home on last year's tax return. (See How to deduct your loss in the preceding year , later.)
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Your home is substantially more dangerous after the disaster than it was before the disaster.
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The danger is from a substantially increased risk of future destruction from the disaster.
Example.
Due to a severe storm, the President declared the county you live in a federal disaster area. Although your home has only minor damage from the storm, a month later the county issues a demolition order. This order is based on a finding that your home is unsafe due to nearby mud slides caused by the storm. The loss in your home's value because the mud slides made it unsafe is treated as a casualty loss from a disaster. The loss in value is the difference between your home's FMV immediately before the disaster and immediately after the disaster.
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The due date (without extensions) for filing your income tax return for the tax year in which the disaster actually occurred.
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The due date (with extensions) for filing the return for the preceding tax year.
Example.
A disaster damaged your main home and destroyed your furniture in 2012. This was your only casualty loss for the year. Your home is located in a federally declared disaster area designated by FEMA for public or individual assistance (or both). The cost of your home and land was $134,000. The FMV immediately before the disaster was $147,500 and the FMV immediately afterward was $100,000. You separately figured the loss on each item of furniture (see Figuring the Deduction , earlier) and arrived at a total loss for furniture of $3,000. Your insurance did not cover this type of casualty loss, and you expect no reimbursement for either your home or your furniture.
You choose to amend your 2011 return to claim your casualty loss for the disaster. Your adjusted gross income (AGI) on your 2011 return was $71,000. You figure your casualty loss as follows:
Furnish- | ||||
House | ings | |||
1. | Cost | $134,000 | $10,000 | |
2. | FMV before disaster | $147,500 | $8,000 | |
3. | FMV after disaster | 100,000 | 5,000 | |
4. | Decrease in FMV (line 2 − line 3) | $47,500 | $3,000 | |
5. | Smaller of line 1 or line 4 | $47,500 | $3,000 | |
6. | Subtract estimated insurance |
-0- | -0- | |
7. | Loss after reimbursement | $ 47,500 | $3,000 | |
8. | Total loss | $50,500 | ||
9. | Subtract $100 | 100 | ||
10. | Loss after $100 rule | $50,400 | ||
11. | Subtract 10% of $71,000 AGI | 7,100 | ||
12. | Amount of casualty loss deduction | $43,300 |
If the damaged or destroyed property was nonbusiness property or employee property and you did not itemize your deductions on your original return, you must first determine whether the casualty loss deduction now makes it advantageous for you to itemize. It is advantageous to itemize if the total of the casualty loss deduction and any other itemized deductions is more than your standard deduction. If you itemize, attach Schedule A (Form 1040) or Form 1040NR, Schedule A, and Form 4684 to your amended return. Fill out Form 1040X to refigure your tax to find your refund.
If your records were destroyed or lost, you may have to reconstruct them. Information about reconstructing records is available at IRS.gov. Type “reconstructing your records” in the search box.
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Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster.
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Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. (A personal residence can be a rented residence or one you own.)
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Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster.
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Payments for expenses otherwise paid for by insurance or other reimbursements, or
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Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation.
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Main home in disaster area earlier under Replacement Property.
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Business or income-producing property located in a federally declared disaster area earlier under Replacement Property.
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Property in a Midwestern disaster area earlier under Replacement Period.
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Property in the Kansas disaster area earlier under Replacement Period.
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Property in the Hurricane Katrina disaster area earlier under Replacement Period.
The IRS may postpone for up to one year certain tax deadlines of taxpayers who are affected by a federally declared disaster. The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA.
If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB).
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Any individual whose main home is located in a covered disaster area (defined later).
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Any business entity or sole proprietor whose principal place of business is located in a covered disaster area.
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Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area.
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Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. The main home or principal place of business does not have to be located in the covered disaster area.
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Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area.
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The spouse on a joint return with a taxpayer who is eligible for postponements.
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Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose records necessary to meet a postponed tax deadline are located in the covered disaster area.
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Any individual visiting the covered disaster area who was killed or injured as a result of the disaster.
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Any other person determined by the IRS to be affected by a federally declared disaster.
If you live in an area that was declared a disaster area by the President, you can get information from FEMA by visiting its website at www.fema.gov, or calling the following phone numbers. These numbers are only activated after a federally declared disaster.
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1-800-621-3362.
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1-800-462-7585, if you are deaf, hard of hearing, or have a speech disability.
IF you have a loss... | THEN deduct it in the year... | |
from a casualty | the loss occurred. | |
in a federally declared disaster area | the disaster occurred or the year immediately before the disaster. |
|
from a theft | the theft was discovered. | |
on a deposit treated as a casualty | a reasonable estimate can be made. |
How you report gains and losses depends on whether the property was business, income-producing, or personal-use property.
If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. The result is your adjusted basis in the property.
You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Do not increase your basis in the property by any qualified disaster mitigation payments (discussed earlier under Disaster Area Losses ). See Adjusted Basis in Publication 551 for more information on adjustments to basis.
If your casualty or theft loss deduction causes your deductions for the year to be more than your income for the year, you may have a net operating loss (NOL). You can use an NOL to lower your tax in an earlier year, allowing you to get a refund for tax you already paid. Or, you can use it to lower your tax in a later year. You do not have to be in business to have an NOL from a casualty or theft loss. For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
Internet. You can access the IRS website at IRS.gov 24 hours a day, 7 days a week to:
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E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.
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Check the status of your 2012 refund. Go to IRS.gov and click on Where’s My Refund. Information about your return will generally be available within 24 hours after the IRS receives your e-filed return, or 4 weeks after you mail your paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2012 tax return handy so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund.
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Where's My Refund? has a new look this year! The tool will include a tracker that displays progress through three stages: (1) return received, (2) refund approved, and (3) refund sent. Where's My Refund? will provide an actual personalized refund date as soon as the IRS processes your tax return and approves your refund. So in a change from previous filing seasons, you won't get an estimated refund date right away. Where's My Refund? includes information for the most recent return filed in the current year and does not include information about amended returns.
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You can obtain a free transcript online at IRS.gov by clicking on Order a Return or Account Transcript under “Tools.” For a transcript by phone, call 1-800-908-9946 and follow the prompts in the recorded message. You will be prompted to provide your SSN or Individual Taxpayer Identification Number (ITIN), date of birth, street address and ZIP code.
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Download forms, including talking tax forms, instructions, and publications.
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Order IRS products.
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Research your tax questions.
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Search publications by topic or keyword.
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Use the Internal Revenue Code, regulations, or other official guidance.
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View Internal Revenue Bulletins (IRBs) published in the last few years.
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Figure your withholding allowances using the IRS Withholding Calculator at www.irs.gov/individuals.
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Determine if Form 6251 (Alternative Minimum Tax— Individuals), must be filed by using our Alternative Minimum Tax (AMT) Assistant available at IRS.gov by typing Alternative Minimum Tax Assistant in the search box.
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Sign up to receive local and national tax news by email.
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Get information on starting and operating a small business.
Phone. Many services are available by phone.
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Ordering forms, instructions, and publications. Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions (limited to 5 years). You should receive your order within 10 days.
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Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
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Solving problems. You can get face-to-face help solving tax problems most business days in IRS Taxpayer Assistance Centers (TAC). An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
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TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. The TTY/TDD telephone number is for individuals who are deaf, hard of hearing, or have a speech disability. These individuals can also access the IRS through relay services such as the Federal Relay Service at www.gsa.gov/fedrelay.
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TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
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Checking the status of your 2012 refund. To check the status of your 2012 refund, call 1-800-829-1954 or 1-800-829-4477 (automated Where's My Refund? information 24 hours a day, 7 days a week). Information about your return will generally be available within 24 hours after the IRS receives your e-filed return, or 4 weeks after you mail your paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2012 tax return handy so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Where's My Refund? will provide an actual personalized refund date as soon as the IRS processes your tax return and approves your refund. Where's My Refund? includes information for the most recent return filed in the current year and does not include information about amended returns.
Evaluating the quality of our telephone services. To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to listen in on or record random telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Some products and services are available on a walk-in basis.
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Products. You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
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Services. You can walk in to your local TAC most business days for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local TAC where you can talk with an IRS representative face-to-face. No appointment is necessary—just walk in. Before visiting, check www.irs.gov/localcontacts for hours of operation and services provided. If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested by calling your local TAC. You can leave a message and a representative will call you back within 2 business days. All other issues will be handled without an appointment. To call your local TAC, go to
www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
Mail. You can send your order for forms, instructions, and publications to the address below. You should receive a response within 10 days after your request is received.
Internal Revenue Service
1201 N. Mitsubishi Motorway
Bloomington, IL 61705-6613
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Your problem is causing financial difficulties for you, your family, or your business.
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You face (or your business is facing) an immediate threat of adverse action.
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You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised.
DVD for tax products. You can order Publication 1796, IRS Tax Products DVD, and obtain:
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Current-year forms, instructions, and publications.
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Prior-year forms, instructions, and publications.
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Tax Map: an electronic research tool and finding aid.
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Tax law frequently asked questions.
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Tax Topics from the IRS telephone response system.
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Internal Revenue Code—Title 26 of the U.S. Code.
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Links to other Internet-based tax research materials.
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Fill-in, print, and save features for most tax forms.
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Internal Revenue Bulletins.
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Toll-free and email technical support.
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Two releases during the year.
– The first release will ship the beginning of January 2013.
– The final release will ship the beginning of March 2013.
Purchase the DVD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee).
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