The <i> Good</i> Quake News: You Can Deduct Losses

If you’re a victim of the Northridge earthquake--and insurance or disaster relief didn’t cover all your losses--you may be in line for thousands of dollars worth of 1993 tax deductions.

If you have un-reimbursed disaster losses, consider filing for a casualty loss deduction on your 1993 tax return--even if the loss occurred in 1994. Federal tax laws allow people in designated disaster areas the option of claiming casualty losses in the year that they occurred, or in the previous year. The idea is to quickly get refunds into the hands of people who need the money. It also allows taxpayers to push their deductions into the year in which they’d do the most good.

Disaster victims should realize that the tax breaks fall far shy of compensating for actual losses. However, they can substantially pare your current tax bill or land you a tax refund. Additionally, if your casualty loss deductions substantially exceed your taxable income, you may be able to use leftover losses on next year’s return--or carry them back to a previous year’s return to get another refund.

But casualty loss deductions are complex and frequently trigger tax audits. If you claim these losses, pay close attention to details and keep exceptionally good records.

Who qualifies for casualty losses and how do they work? Here are some answers:

Q: What is a casualty loss?

A: It is a loss from a “sudden, unexpected or unusual event,” such as a fire, flood, mudslide, earthquake, windstorm or theft.

Q: Can I deduct all the losses I suffer in a disaster?

No. You can only deduct a portion of your un-reimbursed losses. First you must subtract insurance and “other” reimbursements--such as federal disaster grants. Then, you only can deduct the un-reimbursed losses that exceed 10% of your adjusted gross income, plus $100.

To illustrate, consider Jane, who earns $60,000 annually and suffered $50,000 in losses from the Midwestern floods. She had no flood insurance, but got $10,000 in disaster aid from the federal government. The $10,000 grant reduced her actual casualty loss to $40,000.

She then subtracts $100 from the $40,000 un-reimbursed loss to get $39,900. She multiples her annual income by 10%, to get $6,000 and subtracts that from the loss, as well. Her deduction amounts to $33,900.

Q: What if you have two casualty losses in one year? Does each one have to meet the “10% plus $100” test?

A: No. The 10% test applies to cumulative casualty losses in any given year. The $100 applies to individual losses, says Ken Anderson, partner with the accounting firm of Arthur Andersen & Co. in Los Angeles.

Q: Is everything I lose deductible? Or are there limitations for personal items or business property?

A: Technically, every loss is deductible. But it can be tricky to figure out the loss amount. That’s because, for tax purposes, your loss amounts to the smaller of the decrease in fair market value of the property or the “adjusted basis”--the cost.

For instance, let’s say you lost three antique crystal lamps in the Northridge earthquake. It would cost $3,000 to replace the lamps, but they were given to you by your grandmother, now deceased, who purchased them new for $10 each. If Grandma gave you the lamps when she was alive--rather than bequeathing them to you in her will--your “adjusted cost basis” is just $30. If they were willed to you, the cost would be whatever value was assigned to the items in probate, which would probably be substantially more. But, in either case, the tax cost would be substantially less than the “decrease in fair market value” which is usually deemed to be the replacement or repair cost.

Q: What about business property? The computer that I use in my home office was completely destroyed. Can I deduct that?

A: Yes, if you still have a taxable cost in the item. But, if you’ve had the computer for a few years and have been filing your returns correctly, you probably don’t. That’s because you’re allowed to either depreciate or “expense” business equipment on your tax return. If you expensed the item, you would have gotten a deduction equal to the computer’s value in the year you bought it. That leaves you with a zero “cost basis.” In other words, no deduction.

Q: What sort of records do I need to keep if I claim a casualty loss?

You need records that substantiate what you lost, what it cost and how much of the loss was reimbursed.

One of the best documents is your insurance claim, which should be filed regardless of whether or not you expect payment from the insurer. The claim form usually details all the items that were damaged or destroyed and what they cost.

If you’re claiming casualty losses for business property, you may also need documentation--such as previous years’ tax returns--to substantiate your “cost basis” in the property.