Superstorm Sandy affected hundreds of thousands of people and caused billions of
dollars in damages to personal property. As victims submit claims and receive
payments from carriers, it’s important to consider the tax implications of your
insurance policy’s proceeds. If damages are covered by insurance you may run into a
scenario in which you actually owe taxes.
This occurs when the amount your policy pays out exceeds the tax basis of the
damaged or destroyed property. Generally speaking, any taxable gain from the
proceeds of an insurance policy must be reported, unless the repair or replacement
of your property reaches a certain cost, or you make a special tax election to defer
the gain. If you decide to defer, then only the money left over after repairing and
replacing your property will be taxable.
Unfortunately, as people submit their claims, some are finding that their losses
may not be covered entirely. If you have a loss that is not covered by insurance,
there is a small silver lining. Losses caused by a storm that are not covered
by insurance can be written off on your federal income taxes as personal
However, before you can make your deduction you will first have to do two
things: First, you will have to reduce your personal casualty loss by $100.
Second, you also must reduce the loss by an amount equal to 10 percent
of your adjusted gross income for the taxable year. That means if you have
an adjusted gross income of $50,000 any personal casualty loss must be
reduced by $5,100 (a 10 percent AGI reduction of $5,000 plus the $100
So, let’s say your basement is flooded causing $10,000 worth of damage.
Before taking a deduction you would have to subtract $5,100 from the
$10,000 loss, leaving you with a $4,900 write-off. Since the loss was
caused by a disaster in a federally declared disaster area you would be
able to make this deduction either on your 2012 tax returns or by amending
your 2011 tax returns. By deciding to amend your 2011 tax returns you will
be able to gain some tax saving right away as opposed to waiting to file
your 2012 returns.
Taxes and insurance are both tricky. Contact us if you have any questions.
The Russell Agency is a full service independent insurance agency serving Southport, Fairfield, Westport and surrounding towns in Fairfield County and New Haven County, and all of Connecticut.