The late start to the 2024 hurricane season didn’t prevent it from becoming one of the costliest on record. Debby inflicted severe damage in parts of Florida, but the situation worsened when Hurricanes Helene and Milton hit the same areas. In North Carolina, regions like Chimney Rock, Asheville and Lake Lure faced devastation on a scale few could have imagined.
Homeowners not only suffered catastrophic property losses, but they are also now grappling with the complex process of securing insurance reimbursements. A major complication is that flood and wind damage are often covered by different policies, giving insurers an incentive to deny claims under the coverage that doesn’t apply. Homeowners are likely in for a tough battle.
Amid this disaster, there may be some relief from an unexpected source: The tax code. Certain taxpayers affected by natural disasters can deduct part of their losses. IRS Publication 547, Casualties, Disasters, and Thefts, provides detailed guidance for those affected by federally declared disasters, which include Hurricanes Debby, Helene, and Milton, as listed on FEMA’s website.
These deductions apply to personal-use property, income-producing property, and are not limited to individuals—S and C corporations and partnerships may also qualify.
However, the IRS rules are complex. This post only touches on a few key points, and readers intending to claim disaster-related deductions should consult the publication for full details.
A common scenario involves homeowners whose homes, cars, and other assets were damaged or destroyed by the recent hurricanes. Deductions can be claimed, but they are subject to various conditions and limitations. For example, repairs must be necessary to restore the property to its pre-disaster state and cannot be excessive or exceed the property’s value. Additionally, repairs must be specifically tied to the disaster event. Homeowners cannot claim repairs unrelated to the disaster, like replacing an old fence simply because other work is being done.
Landscaping costs may be deductible if they affect the property’s value. This can include debris removal and pruning or replanting vegetation to restore the property’s pre-disaster fair market value.
Taxpayers can determine the value of their losses through methods such as insurance company declarations, contractor estimates, or the de minimis method, which allows for a good-faith estimate of losses up to $5,000. Regardless of the method, proper documentation is essential.
Special rules apply when part of the home is used for business purposes, such as a home office or retail space. IRS Publication 547 offers examples on how to handle these situations.
Generally, the value of the loss is reduced by $100 per casualty (e.g., $100 for your car, $100 for your home) and then by 10% of Adjusted Gross Income (AGI). For instance, if the total damages to a car and home are $2,000 and $15,000, they would first be reduced to $1,900 and $14,900, totaling $16,800. If the AGI is $100,000, the deduction would be further reduced by $10,000, leaving $6,800 as a possible deduction.
Insurance reimbursements must be deducted before claiming any losses. In rare cases where reimbursements exceed the losses, creating a casualty gain, deductions can only be claimed if losses surpass the gain.
Another helpful rule allows taxpayers who suffered losses from a federally declared disaster to amend their previous year’s return and deduct the loss retroactively. This can be beneficial for those who paid significant taxes in 2023 but experienced a severe hit to their business in 2024, helping alleviate cash flow problems if they receive a refund on taxes paid for last year. However, a (presumably) lower AGI in 2024 might result in a larger deduction, so it’s crucial to weigh both options carefully.
The IRS also extended tax filing deadlines for those in federally declared disaster zones. For all of Florida, March and April deadlines were extended to May 1, 2025, and some fees and penalties were waived.
Additionally, IRA holders affected by a federal disaster may withdraw funds early without incurring the usual 10% penalty and may be able to spread the taxable income from the withdrawal over three years.
For many Floridians and others affected, unexpected relief may come in the form of tax benefits. It’s essential, however, to consult with a knowledgeable tax professional to navigate these rules to maximize the relief available.