New Tax Law Eases Loss Limitations for Katrina Victims

October 11, 2005

The Internal Revenue Service is advising taxpayers who suffered casualty or theft losses as a result of Hurricane Katrina about a recent change to the tax law. A new provision lifts certain loss limitations for Hurricane Katrina victims.

Ordinarily, to figure a deduction for a personal casualty or theft loss, a taxpayer must reduce the loss by $100 and also reduce the total of their casualty and theft losses by 10 percent of their adjusted gross income. Only the excess over these $100 and 10 percent limits is deductible. The new law removes these limits for Hurricane Katrina losses, so that the entire amount is deductible.

To qualify, a loss must be attributable to Hurricane Katrina and it must have occurred after August 24, 2005, in the Presidentially-declared disaster area. The $100 and 10-percent limits still apply to losses that were not caused by Hurricane Katrina.

Like all casualty and theft losses, Hurricane Katrina losses must be claimed as an itemized deduction. Taxpayers who take the standard deduction cannot claim them. A taxpayer cannot claim a deduction for any part of a loss for which they receive or expect to receive insurance or other reimbursement.

Casualty and theft losses are generally deductible only in the year the casualty occurred or the theft was discovered. However, because a Hurricane Katrina loss is a disaster loss, there is the option to deduct it on the tax return for the previous year, 2004. The $100 and 10-percent limits will not apply to that loss in redetermining your 2004 tax.For those who have already filed their 2004 return, the loss may be claimed by filing an amended return, Form 1040X, for 2004.

Claiming the loss on an original or amended return for 2004 will provide an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on the individual tax situation for 2005. Those who wish to claim the loss for 2004 generally have until the due date for filing the 2005 return to do so.

Taxpayers filing or amending their 2004 tax return and whose only casualty or theft losses to personal use property claimed on that return were caused by Hurricane Katrina should write in red ink “Hurricane Katrina” at the top of Form 1040X. They must also attach the 2004 Form 4684, writing “Hurricane Katrina” on the dotted line next to line 11 and entering “0” on lines 11 and 17.

Taxpayers who have been affected by Hurricane Katrina and have questions can call the special IRS disaster hotline at 1-866-562-5227.

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