Reminder: There are special tax breaks for natural disaster victims

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Reminder: There are special tax breaks for natural disaster victims

For many Americans, 2017 was brutal — and that's not meant to be glib. There were 16 natural disasters in the U.S. last year, including one drought, two floods, three tropical cyclones and a wildfire, per the National Centers for Environmental Information.

If you were affected by one of them, there is an oft-forgotten way to possibly recoup financial losses. The U.S. tax code provides special aid to taxpayers and businesses in federal disaster areas. For tax year 2017 (meaning the returns due April 17, 2018), victims of Hurricanes Harvey, Irma and Maria have additional redress. (Note: These tax breaks don't apply to Hurricane Maria victims living in Puerto Rico, because the territory's residents are subject to different tax laws and, in most cases, don't pay federal income tax.)

Here's an overview of the tax breaks natural disaster victims should know about when they file their 2017 tax return in 2018.

Claiming casualty losses

The biggest source of tax relief for disaster victims is the casualty and theft loss deduction. It allows you to deduct damage, destruction or loss of property due to a "sudden, unexpected or unusual" event in a federally declared disaster area from your taxable income, starting with the amount your renters or homeowners insurance didn't cover.

The federal disaster area caveat was added as part of the GOP tax bill that passed in December. Prior to that change, which went into effect Jan. 1, 2018, taxpayers weren't beholden to the government officially declaring their area a disaster zone.

Under the new tax bill, taxpayers no longer have to itemize their losses. Instead, they're allowed to deduct the entire loss not covered by insurance that exceeds $500.

When calculating your casualty and loss deduction, you have to subtract the first $100 of the amount you're claiming in losses. Then, you have the subtract 10% of your adjusted gross income from that amount to find what you're actually allowed to claim.

Additional relief

Victims of the recent hurricanes and wildfires are also eligible for the following:

  • Fee waivers and expedited requests for copies of previously filed federal tax returns, so you can replace paperwork lost in the disaster.
  • Access to loans and hardship withdrawals from 401(k)s and similar employer-sponsored retirement plans for victims and family members as a source of financial aid. Note: Access means access. You still have to pay taxes applicable to the withdrawal or loan.
  • Extended filing deadlines and waived late-deposit penalties for federal payroll and excise taxes normally due during the first 15 days of the disaster period.

Who qualifies?

Individuals with a principal residence in a federally declared disaster area are eligible for aid. You can see if your area is/was one on the FEMA website.

Casualty losses are deductible in the year the disaster occurred, but you also can add them to your prior year tax return to get immediate relief. Keep in mind, tax relief can vary by disaster, so it's important to consult a tax accountant if you're unsure what you are eligible for.

Tax deductions reduce your taxable income and help lower your tax bill. (Not dollar for dollar, like a tax credit would, but every little bit can help.) You can learn more about filing taxes in 2018 here.

Review your homeowners or renters policy

New limits to the casualty loss deduction (i.e., you must live in a federally declared disaster area) underscore the importance of having the right homeowners or renters insurance since you won't need a tax break if your policy covers most losses. Review your policy so you know what it does — or doesn't — cover. A few things to consider:

  1. What events are covered? Damages caused by most of the big natural disasters — flooding, earthquakes, tornadoes, hurricanes and even sinkholes — aren’t covered by traditional renters or homeowners policies. If you live in area prone to these events, you should consider buying additional, separate coverage.
  2. Do you have an actual cash value policy or a replacement cost policy? An actual cash value policy replaces possessions at their depreciated value, while a replacement cost policy will replace the possession at what it costs today. Replacement cost policies provide more coverage and are, therefore, more expensive than actual cash value policies.
  3. What are your coverage limits? Consider the total amount of coverage and individual coverage limits. Most policies limit how much you can claim on items of high value, like electronics or jewelry.

You can learn more about renters insurance, specifically, in our Learn Center.

Image: Karl Spencer