Tax Day Countdown: Crucial Tax Info To Know After Experiencing a Natural Disaster
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Jordan Rosenfeld
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Molly Sullivan
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Recent natural disasters throughout the United States, from Hurricane Helene in the Southeast to wildfires in the Los Angeles area, have shown just how devastating such crises can be to lives, structures and savings accounts.
If you’re in the midst of dealing with losses related to a disaster, the last thing on your mind might be filing your taxes, but the IRS doesn’t halt its demands due to disaster alone. However, with the April 15 Tax Day deadline approaching, there may be ways to reduce your risk of tax liability in these already trying circumstances.
The more you know, the better you can deal with special circumstances during the 2024 tax year. Here are eight tax tips you need to know for dealing with a natural disaster when it comes time to file.
Determine If You’re in a Federally Recognized Disaster Area
Top of your mind, if you’ve suffered a “casualty loss” of any personal property in a disaster, will be what sorts of financial assistance you can receive. The tax deadline for your federal or state income tax returns is quickly approaching so make sure you get all the help you need.
According to Crystal Stranger, an attorney, enrolled agent (EA), senior tax director and CEO of OpticTax.com, while you can claim casualty losses through the Federal Emergency Management Agency (FEMA), you need to be sure it’s been formally designated.
“Sadly, casualty losses were limited by the Tax Cuts and Jobs Act (TCJA) to only cover major disasters. Prior to the TCJA any loss from flooding, fires or storms could qualify, but now this is limited to federally declared disaster zones,” Stranger explained.
If your loss is not included in a federally recognized disaster area, you won’t receive federal funds. So, the first thing to do is to determine if you qualify by visiting DisasterAssistance.gov.
Assess Your Casualty Loss
If you are in a declared disaster zone, then you can start determining if you can take a declared casualty loss deduction on your taxes this calendar year.
“The deduction must be reduced by any insurance reimbursement and FEMA payments you receive, and then is further reduced by 10% of your adjusted gross income and $100. The remaining amount goes onto your itemized deductions, to offset taxable income,” Stranger said.
Sadly, in practice, Stranger said she’s seen few people actually benefit from casualty losses on their taxes. For one, the TCJA raised the standard deduction (it will be $15,000 for individuals and $30,000 for married couples in 2025) and at the same time reduced deductions for state and local taxes to a maximum of $10,000.
“These changes, combined with low interest rates on home loans, make it very rare for itemized deductions to now be greater than the standard deduction amount. And if you don’t already benefit from itemized deductions you will lose much of the value of other itemized deductions,” she explained.
How That Loss Is Determined
Here’s how this would play out in practical terms, Stranger shared. Take a homeowner who lost a home in Altadena in the Los Angeles fires that they purchased 15 years ago for $700,000.
The purchase price would be the starting point for calculating basis, but then they would need to reduce this by the current fair market value of the land, Stranger said. Since properties have gone up in value, it is likely that the land value is at least $600,000, so the basis of the loss is $100,000 (even if it would cost much more to rebuild).
Assuming your insurance was cancelled and you couldn’t obtain new coverage, you’d get the maximum from FEMA of $42,500, so this must be removed from the basis, leaving $57,500 of loss, she explained.
Determine Your Adjusted Gross Income
Next you must determine your adjusted gross income. Assume the loss above is to a married couple who each earn $120,000 per year, so $240,000 total. Thus 10% (or $24,000) reduces the loss above from $57,500 to $33,500. Then this is reduced by another $100, to $33,400. In this case, it’s definitely worth itemizing, as this is higher than the standard deduction amount of $30,000 already. But this would not give much of a tax advantage.
“It is likely that the mortgage would be highly paid down or paid off at that point, so I would estimate the interest portion would be in the $7,000 range. So with the disaster loss, state taxes capped at $10,000 and the mortgage interest, the taxpayers would have around $20,000 in additional deductions to take in 2025. At a 22% tax rate this would give them a total tax deduction of $4,400, not much of a help when rebuilding their home would likely cost in excess of $300,000.”
Penalty Relief
The IRS will still be expecting you to file your taxes as planned, and pay any taxes due. However, there may be penalty and payment relief and extensions available for anyone impacted by a natural disaster, according to Damien Martin, a CPA affiliated with the Illinois CPA Society.
For example, he said, “The IRS recently announced relief on both fronts, basically to say anything that was due Jan. 7 or forward basically is now due Oct. 15.”
In addition to obvious financial hardship associated with such loss, some people may have also lost vital tax documents or records needed to file their taxes, and this can buy you time to gather that information in other ways.
If Records Are Lost in Disaster
On that note, if you do lose vital tax records or documents in a disaster, the burden of proof is still upon you to defend your deductions, Martin pointed out. While many key documents are digitally available and can be requested from the issuers, such as a W-2 or 1099, if you saved hard copy receipts, you may have to get creative through bank and credit card statements, and you could lose some deductions.
“Try to replicate it as best as possible,” Martin said, and advised meeting with an accountant or other tax professional. “The IRS website actually has some really good resources in terms of who to call,” he said.
If You Have an Uninsured Loss
If you’re in a position where you have an uninsured loss, such as not having insurance and you’re not getting other reimbursements or offsets, and you exceed the loss limits, you do have the ability to deduct your losses on the prior year’s tax returns, which could help if you had a tax liability in that year (this might require refiling that year’s returns), Martin explained.
“There’s a lot of thinking that has to go involved in that decision. The first one is you have to know whether there’s a reasonable expectation of reimbursement. You really can’t figure out what your loss is until basically you know what your loss is.”
Special Withdrawal Provisions for IRAs and 401(k) Plans
Lastly, there is a special disaster distribution that can be taken from an IRA or a retirement account without paying the standard 10% early distribution fee all at once. Martin said. “You can spread the income over three years under this special disaster distribution provision.”
It’s good to know your retirement plan can cover both your present and future.
Caitlyn Moorhead contributed to the reporting for this article.
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