If a federally declared disaster damages your property, you may be able to deduct the casualty losses a year early. Under Section 165(i), you can elect to claim the loss on your return for the year before the disaster. As a result, you may get a refund sooner, when you need cash most.
Which casualty losses qualify?
The election applies to a loss that occurs in a federally declared disaster area and results from that disaster. For individuals, personal casualty losses are generally deductible only when they come from a federally declared disaster. So this election is often the main way individuals get relief quickly.
How long you have to make the election
The IRS has finalized regulations (T.D. 9878) that give taxpayers more time to decide. Before 2016, you had to elect by the original due date of your return, usually April 15. That short window put pressure on taxpayers. It also forced the IRS to grant extensions after major disasters.
Under the final rules, you now have until six months after the original due date of your return for the disaster year. You figure this date without any filing extension. In addition, you can revoke the election within 90 days after the election deadline.
How to claim casualty losses in the prior year
You make the election on an original or amended return for the prior year. Rev. Proc. 2016-53 explains the procedures. It also includes rules to make sure you deduct the loss in only one year.
For individuals, you figure the loss on Form 4684. Also, personal casualty losses are reduced by $100 per event and by 10% of adjusted gross income, unless special disaster relief applies. For more detail, see IRS Publication 547, Casualties, Disasters, and Thefts.
Get help claiming casualty losses
Choosing the right year can change the size and timing of your refund. We help clients measure losses and file the election correctly. To discuss your situation, call (415) 842-2940 or book a free 15-minute call.