Tax breaks for hurricane losses: What you need to know

• Victims of Hurricanes Helene and Milton could get a tax deduction for losses.
• The tax break for damage in federally declared disaster areas is generally only available until 2025.
• Experts cover who qualifies for the deduction and how to calculate it.

Tax relief may be available to some disaster victims, but qualifying can be challenging, according to tax experts.

In late September, Hurricane Helene caused damage in Florida, Georgia, North Carolina, South Carolina, Virginia, and Tennessee. Two weeks later, Hurricane Milton hit the middle of Florida with high winds, tornados, and flooding.

The losses from both storms could reach tens of billions of dollars, affecting both insured and uninsured homes.

According to the IRS, some victims can claim a tax break for recent losses in 2023 by utilizing the "casualty loss tax deduction." However, experts caution that the calculation is intricate.

Filing a homeowners insurance claim after a natural disaster can help with living costs.

The casualty loss deduction applies to individuals who have incurred losses due to certain events, such as natural disasters or theft. The tax break works by allowing taxpayers to deduct the amount of their losses from their taxable income.

How to calculate the casualty loss deduction

Mark Luscombe, a certified public accountant and attorney, explained that before 2018, taxpayers who itemized tax breaks could claim the casualty loss deduction for a wider range of personal losses, including home damage from a fire or storm.

The Tax Cuts and Jobs Act of 2017 temporarily limited eligibility for certain tax deductions. Only losses incurred in federally declared disaster areas will be eligible for deduction through 2025, he clarified.

The calculation of casualty loss deductions begins with your home's "adjusted basis," which is the original purchase price plus the cost of specific improvements, as explained by Beth Brennan, vice chair of the disaster relief tax task force at the American Institute of Certified Public Accountants.

She inquired about the decline in fair market value caused by the disaster.

Taxpayers can use the "safe harbor methods" outlined by the IRS, as these generally do not require an appraisal before a disaster hits, according to Brennan.

To determine your home's post-disaster value, you compare it to your adjusted basis. Then, you select the smaller of those two numbers and subtract insurance proceeds and other relief payments.

The final step in the calculation process involves subtracting $100 and 10% of your AGI, which is your total earnings minus specific tax deductions.

Luscombe stated that the higher your AGI, the greater the reduction of your loss.

Congress approves 'qualified disaster losses'

According to Brennan, Congressional action is the driving force behind the special rules for qualified disaster losses.

In the event of a qualified disaster loss, the $100 rises to $500, there is no 10% AGI limit, and victims can add their loss to the standard deduction.

Even if they don't itemize tax breaks, they can still claim the deduction, according to Brennan.

Since late 2020, Congress has not designated any qualified disasters, according to Brennan.

Since 2021, the AICPA has been advocating for permanent tax relief for disaster victims, as they have been subjected to inconsistent treatment.