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Please explain the federal tax deduction for nonreimbursed superstorm Sandy losses.
The answer is too complex to address in one column, so here's the first of two parts. The second part will appear next week.
Brace yourself for disappointment. Your casualty loss for Sandy-related damage can't exceed the cost basis for your house -- i.e., the amount you paid for it, plus past capital improvements. Also, losses are deductible only to the extent that they exceed 10 percent of your adjusted gross income, says Michael Alderman, an East Meadow tax accountant.
Calculate your tax loss on Form 4684, starting with your actual loss; that's the difference between the fair market value of your property before and after superstorm Sandy. You may want to get a qualified appraisal if you sustained a very large loss. Then compare the loss to your cost basis. "If your house was valued at $500,000 before Sandy and $300,000 afterward, your loss is $200,000," says Alderman. "But if your cost basis is $100,000, you can't claim more than $100,000."
Next, reduce the smaller number -- $100,000 in this example -- by expected reimbursements like insurance and government assistance. If you expect $30,000 in reimbursements, for example, your tax loss is $70,000. (If your reimbursements exceed your cost basis, you have no deduction -- and depending on the type of reimbursement, you may even have a taxable gain. Government assistance usually isn't taxable, Alderman says. Excess reimbursement for property damage isn't taxable if you reinvest it in property.)
Your tax loss is $70,000. Now subtract $100 for each 2012 casualty event you're claiming. If Sandy's the only one, your deductible loss is $69,900. But your actual deduction is limited to losses exceeding 10 percent of your adjusted gross income. If your income is $100,000, you can deduct $59,900.
Next week: Claiming your deduction.
Websites with more information 1.usa.gov/V7yXhr and bit.ly/WM7lzD
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