Casualty Loss

With a large scale natural disaster that affects millions of people who lost most of their material possessions, there will be a large increase in the number of casualty and theft loss deductions being claimed. However, unlike ordinary casualty and theft loss calculations, losses that result from Hurricane Katrina in the designated disaster area after August 24, 2005 will not be subject to the $100 minimum or the 10 percent adjusted gross income floor.

Casualty losses in the Hurricane Katrina disaster area will be treated as a separate deduction from other casualty losses. In addition, if the taxpayer elects to file an amended return for 2004 to claim the casualty loss deduction, they can still take advantage of these new rules. Because the casualty and theft loss deduction carries to the Schedule A, taxpayers must itemize deductions to claim the deduction. These new rules will allow many people who have not been eligible to claim itemized deductions in the past to do so.

Smart tax planning will allow taxpayers to claim the loss deduction on the year that will provide the smallest tax liability overall. Filing a 2004 amended return may help the taxpayer get the money faster, but waiting until 2005 might actually yield a lower overall tax liability. Determining which year to claim the deduction will have to be determined on a case-by-case basis.

Form 4684 will be revised to accommodate the new rules for qualified Hurricane Katrina losses. Losses from Hurricane Katrina will be calculated on Form 4684 separately from non-Hurricane Katrina losses and added to the total to be carried to the Schedule A.

From December 2005

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