Tax Benefits from the Ice Storm
The declaration of the northern half of Arkansas as a federal disaster area will cause a seldom-used tax deduction to be a deduction that the majority of home owners in Northwest Arkansas should consider when filing their 2008 income tax returns.
The ice storm we all experienced at the end of January 2009 caused varying amounts of damage to just about every home in Northwest Arkansas. As we continue to clean up, we need to maximize the tax â€œbenefitsâ€? of the damage caused by the storm. Individuals can take a tax deduction for the "casualty" of personal-use property. A casualty is the damage or loss of property caused by a sudden or unexpected event such as a car accident, storm, or flood. The ice storm damage to our homes, trees, cars, food in the refrigerator, and other property we use personally qualifies as a casualty loss and can be a tax deduction.
The amount of the deduction is generally the decrease in the fair market value (FMV) of the property due to the storm. The amount of decrease in FMV is where the property owner and the IRS will disagree. Often, the cost of cleaning up and putting the property back to its original condition can be used as the measure of the decrease in FMV as long as the repairs 1) are actually made, 2) are necessary to bring the property back to its pre-casualty condition, 3) are not excessive, 4) take care of the damage only, and 5) do not increase the value of the property over the value before the casualty.
You may measure the loss in value to your landscaping by what you spend on 1) the removal of damaged trees, 2) pruning to preserve the trees, and 3) replanting to restore the property to its value before the casualty.
To normally calculate the tax deduction, the total amount of the loss must first be reduced by insurance reimbursements. Next, the first $500 (beginning in 2009) of the casualty is not deductible. This amount was increased from $100 in 2008. After excluding the first $500, the casualty loss is again reduced by 10% of the taxpayer's income. In most casualty losses, this isnâ€™t a very good tax deduction because of insurance reimbursements and the two limitations mentioned above.
Hear's the good news!
When the president declared the northern half of Arkansas a federal disaster area, the casualty loss tax deduction became a much better deduction.
Things To Consider
If the 2009 ice storm caused more than $100 in damage to your property, you need to consider taking a casualty loss deduction on your 2008 income tax return. The damage could be to your home, car, landscaping, food in the refrigerator, etc.
If you're a do-it-yourselfer and are cleaning, pruning, and replanting yourself, track all your out-of-pocket costs including materials and supplies. In my opinion, the IRS will not allow a value of personal time as a repair cost. If the damage is sizable, strongly consider hiring a qualified appraiser to determine the decrease in value to your property. The cost of the appraisal and the potential tax benefit must be considered in deciding if the tax benefit outweighs the cost of the appraisal.
The task is a little easier for those that hire a qualified company to restore your property. The amount you spend to restore your property will be used as your tax deduction. Remember that the money actually needs to be spent. An estimate from a subcontractor will not suffice.
Lastly, take picturesâ€¦lots and lots of pictures both before cleanup and after cleanup.
Please feel free to call or e-mail our office if you have questions.