Tax Break for Disaster Losses Largely Disappears in Tax Law
Taxes & Homeowners Insurance: According to the new law, taxpayers can only claim personal casualty losses if the damage is attributed to a disaster that is declared by the president. This new limitation starts in 2018 and will expire seven years later in 2025.
The new republican tax plan may have an impact on your homeowners insurance that you should be aware of, in fact if your home is destroyed by fire, flood or other covered perils next year you will most likely not be able to claim the losses on your taxes. The Tax Cuts and Jobs Act, which was recently signed into law limits the amount filers can deduct for personal casualty and theft losses.
Under current tax law, taxpayers were allowed to claim an itemized deduction for property losses that stem from natural disasters such as fires, flood and other events that were not covered by insurance. The total of the losses must exceed 10 percent of your adjusted gross income in order for you to deduct the losses.
According to the new law, taxpayers can only claim personal casualty losses if the damage is attributed to a disaster that is declared by the president. This new limitation starts in 2018 and will expire seven years later in 2025.
According to the latest data from the IRS, 72,323 homeowners deducted casualty and theft losses on their 2015 tax returns, which is the most recent data.
“Floods occur almost monthly across this country and there are home fires where people are financially devastated,” Douglas J. Lyons, managing director of Oceanic Capital Management in Red Bank, New Jersey said in a recent CNBC article. “To not be able to use this one simple tax relief to help people get back on their feet is going to be really painful,” he continued.
The new rule takes affect just in time for the winter season, which is a particularly dangerous time for home fires. According to data from the National Fire Protection Association, half of all home heating fires happen in December, January and February.
Christmas trees can be a major problem with over 200 home fires being attributed to them every year. Unfortunately, this type of damage will no longer be tax deductible.
A Few Tips
Despite the fact that you will no longer be able to deduct your losses there are measures you can take to make sure you are covered by insurance.
Review Your Policy: Reading an insurance policy is fairly boring but it is important to know your coverage levels. Review your policy and be sure that you understand your coverage levels. If you have any questions or don’t understand your coverage, ask your agent.
Make sure you are carrying enough coverage to rebuild your home and replace all of your personal property. If you upgrade your home, add an addition or purchase expensive personal property you should review your policy and update coverage levels accordingly.
Replacement Value vs. Actual Cash Value: Homeowners insurance is available in two different flavors and one is definitely better than the other.
Replacement value insurance will replace your possessions with a similar item regardless of cost or how old your possession was at the time of destruction. As an example, if your TV were 10 years old when it was destroyed you would get a brand new TV of similar size and quality.
Actual Cash Value insurance takes deprecation into account when determining the value of your possessions. This means that your ten-year-old TV is not worth all that much and the claim check you receive for it will probably not cover the cost of a new TV.
While replacement value insurance tends to be a bit more expensive, it is well worth it if you have to make a major claim.
Beware the Deductible: Always be aware of your deductible and make sure you can cover it in the event of a claim. Raising your deductible will lower your premium and is a great way to lower the cost of your homeowners insurance but make sure it is an amount you can easily cover in the event you have to make a claim.
Experts recommend putting your deductible amount in an interest bearing account and leaving it alone unless you have to make a claim.
Document Your Belongings: Always keep an up to date home inventory. This will make the claim process much easier and will help ensure that you are paid fairly for your lost possessions. There are numerous apps that can help make this process easier.
High value items are capped on most homeowner insurance policies, around $1,500 so if you own a number of high value items such as artwork, wine, furs, or jewelry you may need a rider to fully protect your possessions.