The upheaval after a sudden disaster can be overwhelming. People may lack basic needs such as food, water, electricity and phone service -- and some even lose their homes and businesses.

Tax Casualty Loss Rules    

    You can deduct a property loss resulting from an event that is "sudden, unexpected or unusual." This definition not only covers natural disasters, but also damage resulting from certain other mishaps. The same rules apply to thefts and vandalism of your personal property.
    As a general rule, you can deduct the lesser of the property's basis (usually, its cost plus improvements) and the fair market value of the property, reduced by any insurance proceeds received to compensate you for the loss. It is recommended that you have the value of the damage estimated by a professional appraiser. Then you must apply two tax law limits:

  • Each casualty or theft loss incurred during the year is reduced by $100.
  • The remainder (after subtracting $100 per event) is deductible to the extent it exceeds 10 percent of AGI.

    Note: The two limits above only apply to personal property. There are no such restrictions on losses to business property.
    Normally, you're required to deduct casualty and theft losses in the year in which the event actually occurred. But there's a special rule for losses suffered in a federal disaster area.
    Election: In a federally declared disaster area, you can choose to claim a casualty loss on the tax return for the year preceding the year of the event. In other words, you can file an amended return for 2011 instead of waiting until next year to file your 2012 return. If you obtained a filing extension for the 2011 tax year, you can still claim the loss on the 2011 return you must file by October 15, 2012.
    The election can get your hands on the tax money quicker. The IRS will send you a refund, if you're entitled to one, within weeks of receiving your amended return or your return with extension. The special election is available to itemizers and non-itemizers.
    What if you change your mind? Let's say you determine that it's better to have a casualty loss offset your tax liability for 2012 rather than 2011. The tax law gives you 90 days to revoke the election by returning any refund or credit you received. If the IRS hasn't sent the money yet, you must return it within 30 days of receipt.

Disasters also place demands on the employees of insurance companies. If a devastating event damages your home or business -- a hurricane, fire, tornado, windstorm, theft or other catastrophe -- you may have to file an insurance claim at the same time as thousands of other people. 

Being prepared can ease some of the burden. Homeowner's insurance policies have limitations and certain procedures that must be followed. Here are some important steps to take before and after a disaster strikes:

Homeowners: After a Casualty:

Call your insurance company as soon as possible to report the damage because insurance policies place a time limit on filing claims. Ask for the required forms to be sent to you. Find out if the insurer will be sending an adjuster to your home to inspect the property and when. Keep records of the time and date of your call, as well as the names of insurance company employees you speak with.

Ask questions such as: Does my policy cover this damage? What is my deductible? What is the procedure for obtaining estimates to repair the damage or replace the property that was destroyed? How long will the processing of my claim take? 

Find out what living expenses are covered. If your home sustains so much damage that you cannot live there while it's being repaired, homeowner's insurance generally pays some living expenses. There are limits on the amount covered but typical expenses include the cost of a hotel and restaurant meals. Keep receipts to submit to the insurance company. Make sure your insurer also has the phone number where you are staying temporarily.

Take photos or videotape the damage as soon as possible in case the claim is questioned or the insurance adjuster cannot come to your area right away. 

Compile a list of lost or damaged items to help substantiate your claim. Give this inventory to the insurance company, along with any photos, receipts and other documentation you have. 

Make temporary repairs. To protect your home from more damage, make reasonable temporary repairs such as covering broken windows and damaged roofs. (Don't make major non-emergency repairs until an insurance adjuster can see and assess the damage.) Save receipts to submit them to your insurance company for reimbursement.

If the damage is the result of theft or vandalism, report the crime to the police and get a copy of the police report.

Do not accept an unfair settlement. After your insurance company receives the necessary information, it will accept or reject your claim and offer a settlement. If you don't agree with the amount, you don't have to accept it. Ask your agent for an explanation. In many cases, insurers will negotiate until both parties agree.

If you can't reach an acceptable agreement, you can appeal to the company's chief claims office. There may also be an arbitration process. If you still don't get satisfaction, you can complain to the state insurance department. 

Stay safe. Many injuries happen in the calm after a storm. Downed power lines, flooded roads, unstable buildings, contaminated water, falling debris and leaking gas lines are just a few of the hazards to avoid.

Businesses: After a Casualty

Be prepared to extensively document income losses. Many businesses have business interruption insurance -- and possibly contingent business income coverage, which provide compensation if operations are forced to shut down temporarily after a disaster.

To file a claim, businesses must generally provide a great deal of documentation and it's not uncommon for claims to be denied. 

The insurer will want to know the income your business was generating before and after the loss. Your business needs to identify and segregate revenues, costs and expenses, as well as review your company's profit projections to help ensure they are accurate and solid enough to hold up to a potential dispute.

Seek professional help from your accountant and attorney to prepare the financial records and loss analysis as well as deal with any disputes.

Homeowners: Before a Casualty:

Keep your policy up to date. Have you built an addition on your house or remodeled the kitchen? You may need to increase coverage to protect the higher value of your property. Similarly, if your home's value has greatly increased, you may need to adjust coverage so you are not underinsured if an emergency occurs. 

Review the adequacy of your policy limits. Investigate how much it would cost 

Top 10 Most Costly Hurricanes in the U.S. through 2011*

 

Rank

Hurricane

Location

Date

1.

Katrina AL, FL, GA, LA, MS, TN Aug. 25-30, 2005

2.

Andrew FL, LA Aug. 24-26, 1992

3.

Ike AR, IL, IN, KY, LA, MO, OH, PA, TX Sept. 12-14, 2008

4.

Wilma FL Oct. 24, 2005

5.

Charley FL, NC, SC Aug. 13-14, 2004

6.

Ivan AL, DE, FL, GA, LA, MD, MS, NJ, NY, NC, OH, PA, TN, VA, WV Sept. 15-21, 2004

7.

Hugo GA, NC, PR, SC, VA, U.S. Virgin Islands Sept. 17-22, 1989

8.

Rita AL, AR, FL, LA, MS, TN, TX Sept. 20-26, 2005

9.

Frances FL, GA, NY, NC, SC Sept. 3-9, 2004

10.

Irene CT, DC, DE, MA, MD, ME, NC, NH, NJ, NY, PA, RI, VA, VT Aug. 26-28, 2011

* Property coverage only; Does not include flood damage covered by the federal program. 
Source: Insurance Information Institute

to replace your home and whether your policy limits cover that amount. Try to obtain guaranteed replacement cost coverage, where the insurance company will rebuild your home even if the cost exceeds the policy limits. This doesn't mean you have to insure your property for its full market value. Even if your home is totally destroyed, you won't have to replace the land.

Be aware, however, that some companies no longer offer guaranteed replacement cost coverage and those that do define it in different ways. Some companies rebuild no matter what the cost, while others cap coverage based on a certain percentage of the policy's face value. Make sure your policy has an inflation endorsement that increases coverage annually for increases in construction costs.

Obtain coverage for special risks. Basic policies provide protection from fire, smoke, windstorms, vandalism, and lightning. The most comprehensive policies cover every peril except those specifically excluded, typically floods, earthquakes, war, and nuclear accidents. You may need to obtain specific coverage for your area.

However, be aware that insurers can impose restrictions in some areas. For example, in the hurricane-prone states listed in the right-hand box, many insurers only sell homeowner's insurance policies with percentage deductibles for storm damage instead of the traditional dollar deductibles that are used for other types of claims. For example, with a policy that has a $500 deductible, the policyholder must pay the first $500 out of pocket. But if a house is insured for $200,000 and has a 2 percent deductible, the policyholder must pay the first $4,000 out of pocket.

Understand what other items are covered by your policy. Homeowner's policies typically cover personal items, other structures on the property, landscaping, living expenses when a property is destroyed, and personal liability coverage. Carefully review the limits for all of these items, since you may be able to add endorsements if you need additional coverage. Pay special attention to limits for items such as jewelry, antiques, collectibles, and works of art.

Inventory your real estate and property. The easiest way is to take "before" photos or videos to compare with any "after" pictures you take in the event of a disaster. Don't overlook anything. A complete inventory should include the landscaping and outdoor features, garage, attic, basement and autos. Include furniture, appliances, jewelry, artwork, and the contents of closets, cupboards and drawers. Be just as thorough when taking an inventory of your business property. Store the video or photos securely. Keep a copy in your safe deposit box and give a copy to a close relative or friend.

Make an "evacuation box." Keep copies of important documents in an easy-to-carry container that you can grab as you leave your home in the event of an emergency. (Always store originals in a safe deposit box). This box should have documents and papers you need for income tax and insurance purposes, as well as medical information and negatives of important family photos.

Businesses: Before a Casualty:

Check out our preparation checklist. No matter what size your business is, planning ahead can help reduce injuries, minimize property damage, cut costs and ultimately speed up recovery. For a checklist to help ensure your operation is ready for a potential disaster, click here.
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