Personal finance

Battling flood damage? Here’s why you’ll have a hard time getting a tax break for it

Tropical Storm Barry is shown in the Gulf of Mexico approaching the coast of Louisiana, in this July 11, 2019 NASA satellite handout photo.

NASA | Reuters

Homeowners dealing with damage from summer storms have another disappointment ahead: They may not be able to get a tax break for their losses.

That’s because a provision in the Tax Cuts and Jobs Act – the tax code overhaul that went into effect in 2018 – limits the extent to which you can claim a deduction for property damage.

You can now only get a tax break if the damage is due to a federally declared disaster.

“It was always a difficult deduction to claim,” said Robert Westley, CPA and member of the American Institute of CPAs’ Financial Literacy Commission. “And now it’s even harder.”

Residents don’t have to be at the epicenter of a hurricane to feel its effects.

For instance, Hurricane Barry made landfall in Louisiana on Saturday, July 13.

As the storm continued north and dissipated, residents as far as New York and New Jersey dealt with torrential rains and flooding from Barry’s remnants.

As of July 9, there were six weather and climate disaster events with losses exceeding $1 billion, according to the National Oceanic and Atmospheric Association.

There could be nine to 15 named storms in 2019, according to NOAA. The Atlantic hurricane season runs from June 1 to Nov. 30.

Law changes

The Internal Revenue Services offices in Washington, D.C.

Adam Jeffery | CNBC

Before the new tax law, taxpayers who itemized deductions on their federal return could claim property losses that weren’t reimbursed by insurance and that were the result of natural disasters, accidents, fires and more.

Now you can only claim this deduction if the damage is attributable to a federally declared disaster. This change is in effect from 2018 through the end of 2025.

Your total losses must be more than 10% of your adjusted gross income.

Further, the new tax law also raised the standard deduction ($12,200 for single filers and $24,400 for married-filing-jointly in 2019), roughly doubling it from its prior levels.

It was always a difficult deduction to claim, and now it’s even harder.

Robert Westley

CPA and member of the American Institute of CPAs’ Financial Literacy Commission

As a result, fewer taxpayers are likely to itemize deductions on their returns — meaning even fewer people will be able to write off casualty losses, Westley explained.

In all, 154,274 taxpayers filed returns claiming casualty and theft losses in 2016, according to the most recent data available from the IRS.

“In the past, maybe the tax benefit provided some relief,” Westley said. “That relief is more or less gone.”

Homeowners should bolster their own finances and review their insurance coverage to make sure they’re prepared for a disaster, he said.

Preparing for disasters

Stores along Main Street sustained severe damage after a storm system dumped over 9-inches of rain in about a two-hour span on Sunday, and workers begin the task of cleaning up May 29, 2018 in Ellicott City, MD. (Photo by Katherine Frey/The Washington Post via Getty Images)

Katherine Frey | The Washington Post | Getty Images

Don’t rely on the casualty loss deduction to shore up your finances in the event of a disaster.

Instead, build a cash buffer for emergencies and make sure your homeowner’s insurance is up to snuff.

Understand your policy: Even the best homeowner’s insurance policy has its blind spots. Hurricane deductibles could leave you on the hook for 1% to 5% of your home’s insured value, depending on where you live.

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Nineteen states have hurricane deductibles: Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia.

Separately, you’ll need to buy flood insurance through the National Flood Insurance Program or the private market.

Know what’s covered: Comb through the fine print of your policy and work with your agent to shore up your coverage. Specialty items, including art and valuables, will likely need a rider or an endorsement to be insured.

Maintain liquidity: Keeping an emergency fund that can cover costs for three to six months is a good practice. This bucket of cash can also help you cover deductibles and other out-of-pocket costs.

In a pinch, a home equity line of credit that you keep open for emergencies will do, too.

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