If you were affected by a natural disaster — whether a flood, hurricane, tornado, or fire — in 2021, you may be eligible for a tax break. The main tax break available is the itemized deduction for casualty and theft losses. Other forms of tax relief may also be available from the IRS, including tax filing extensions, payment extensions, and multiple types of waived fees.
However, after changes to the tax law in 2017, not all natural disasters qualify for relief. You must live in an area the president has legally declared as a disaster area, which generally includes all areas where residents and business received aid from the Federal Emergency Management Agency (FEMA). Additionally, COVID-19 is not a natural disaster relief for federal taxes purposes.
Deducting property loss after a natural disaster
The deduction for casualty and theft losses allows taxpayers to deduct the value of personal property and real estate that was damaged or lost because of a federally declared disaster. However, after the 2017 tax changes, claiming the deduction may be more difficult for some people.
Here are some key eligibility requirements to keep in mind:
After 2017, you can only deduct losses due to federally declared disasters.
You must itemize deductions on your federal income tax return. While the deduction is possible if you don’t itemize, the value you can claim is potentially much reduced.
You can only deduct losses in excess of property and home insurance payouts you receive.
Each individual loss you want to deduct must be more than $100.
The total amount of all losses you want to deduct must be worth more than 10% of your adjusted gross income (AGI).
Losses related to COVID-19 are not eligible.
If you do want to claim the deduction, consider working with a professional tax preparer to ensure you complete all the paperwork properly, and be sure to check out our list of 53 tax deductions and tax credits you can claim to see which ones you may qualify for.
Also, ask an expert about the option to deduct your losses for the previous tax year (the year before the natural disaster), which would require you to file an amended tax return and isn’t available in all situations.
What is a federally declared disaster?
A federally declared disaster is one that occurred in an area that the U.S. president has declared eligible for federal assistance. When looking for tax relief for an event that affected you, it’s important to make sure your county or state is eligible, because it’s possible that some affected areas aren’t covered in an official disaster declaration. For example, remnants of a hurricane that passed through a neighboring county may have caused damage to your property, but you can’t receive relief unless your county is also covered by the disaster declaration.
You can find a complete list of declared disasters on FEMA's website.
Additional tax relief for disaster victims
Individuals and businesses affected by major disasters will likely receive some kind of additional tax relief from the IRS. The most common form of relief is a tax extension for all upcoming payment or filing deadlines. The length of the extension period, called the disaster relief period, varies based on the date and severity of the event. (If you need more time to file but haven’t received an extension through a disaster, consider a standard tax extension.)
Below are some more available forms of tax relief for disaster victims:
Fee waivers and expedited document requests: Receive free copies of previously filed federal tax returns to help you replace lost paperwork.
Access to hardship withdrawals: Victims of a disaster may be able to withdraw money early from a 401(k) or other retirement plan. You still have to pay tax on any withdrawals if they haven’t already been taxed.
Payment plans are suspended: If you have any installment payment plans with the IRS, your payments will be suspended during the disaster relief period. Check with the IRS to see the exact dates during which your payments will be suspended. You can still accrue interest and penalties for payments due before the date of the disaster.
Home sale exclusion still applies: If your home is destroyed in a natural disaster and you decide to sell the vacant land, the sale is still covered by the home sale exclusion, officially called the Section 121 exclusion. Your first $250,000 of income from the sale ($500,000 if you’re married) is exempt from capital gains and income tax.
Check the IRS website for the exact list of tax relief for 2021 disasters.
Tax relief for people outside the disaster area
You can also get relief if you don’t live in the disaster area but you can’t access financial documents or business records because they were located in the disaster area. For example, this may apply to you if you are in an S corporation or partnership and can’t submit the necessary Schedule K-1 forms because documents were lost in the disaster.
Additionally, if your normal tax preparer can’t file your return because they live in the disaster area, relief may be available for you, even if you live elsewhere.
Is COVID-19 a natural disaster for tax purposes?
No, the coronavirus does not qualify as a natural disaster for federal taxes purposes, and you cannot use the deduction for casualty and theft losses for COVID-19.
There may be other tax breaks available to you if you were affected by the coronavirus. Parents who had to pay for child care so they could go to work, look for work, or attend school, may be eligible to deduct some of those childcare costs through the child and dependent care credit. If you are self-employed and couldn’t work because you had COVID-19 or because you needed to care for someone who had it, you may be eligible to receive a tax credit worth up to $200 for each day of work you missed. For 2021, teachers can also deduct unreimbursed expenses for protective items and personal protective equipment — like gloves, masks, hand sanitizer, and cleaning wipes — are FSA and HSA deductible.
Make sure to review your homeowners or renters policy
Receiving financial aid through the tax system can be difficult and it isn’t always a guarantee. The best way to protect your property may be to ensure you get the right home insurance policy right from the start. Here are a few questions to consider when shopping for a policy:
What events does your policy cover? Traditional home and renters insurance policies don’t cover common natural disasters such as floods, tornadoes, hurricanes, or sinkholes. Homeowners who live in places prone to these events should consider buying additional coverage through a separate policy.
Do you have an actual cash value policy or a replacement cost policy? The type of policy you have determines how much your insurance will pay you. Replacement cost policies generally provide more coverage and provide larger payments because they reimburse you based on the current value of a new item that’s similar to the one you lost. An actual cash value policy reimburses your property’s value after factoring in depreciation. Learn more about actual cash value vs. replacement cost.
What are your insurance coverage limits? Don’t forget to consider the total coverage limit and the limit for individual items. Even if you have a high total coverage limit, policies generally limit how much you can claim on an individual item of high value, such as jewelry or an electronics device.
How much is your additional living expenses coverage? Also called loss of use coverage, this pays for you to stay somewhere if your house becomes unlivable. The coverage is 20% of your overall dwelling coverage, but you want to consider a higher amount if you’re in a disaster-prone area. It will cost more on your policy, but more coverage can make life easier after you’ve just experienced a disaster.
Image: Karl Spencer
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