Tax Implications of Superstorm Sandy

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

casualty losses.

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

reduction.)

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.

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