After Disaster, Homeowners Face Challenging Tax Changes

Taxes

After Disaster, Homeowners Face Challenging Tax Changes

The new tax law includes adjusted limits for homeowners looking to deduct losses from natural disasters.

September 20, 2018

By now, many of us are familiar with the big changes from the December 2017 Tax Cuts and Jobs Act. But you may not have realized that the new law also changed deductions that homeowners can claim following a catastrophe.

Under previous tax law, homeowners could recoup some financial losses incurred from a disaster – such as a fire, hurricane or theft, among others – via deductions on their tax return. The new tax law, however, limits when a homeowner can deduct disaster losses.

Tax Law 101

Under the new requirements to deduct a disaster (known in tax terms as a casualty loss), the loss must be caused by a presidentially declared disaster. But even that doesn’t guarantee an eligible deduction. The final requirement: the loss, above and beyond what is received from insurance, must exceed 10 percent of your adjusted gross income.

“The higher your income, the less chance that deduction would be able to be claimed,” said Chris Raulston, wealth management expert and certified public accountant. “The old law used to cover theft losses and that deduction is gone now, too.”

Know Your Insurance Policy

Your home is likely your most valuable asset. Should disaster strike, your first and most important line of financial defense is proper insurance coverage.

A standard homeowner policy covers the replacement value of your home, and most of its contents, due to causes like fire and smoke and hail. Expensive items like jewelry or art will probably need a separate policy.

Unusual exposures and risks specific to certain areas are commonly excluded to ensure the availability of cost-effective coverage, according to insurance analyst Greg Peters. Additional coverage for any area-specific risks might be wise or even required by law.

Flood insurance is separate from homeowner insurance and is federally mandated for high-risk areas. If the maximum $250,000 of coverage offered through the National Flood Insurance Program is not enough to rebuild your house, excess flood coverage is available to more fully insure your home.  

Six Ways to Prepare for Disaster

Waiting until natural disaster strikes to wade through your insurance policy can be a costly mistake. Consider the following tips to position your property and finances for the best possible outcome after a worst-case scenario.

  • Annually review all of your insurance policies, not just for total liability and protection, but also the deductibles. Insurance providers frequently offer discounts if specific criteria are met or if multiple lines are packaged.
  • Increase coverage if you improve or expand your home.
  • Take local building costs into account. “If a flood takes out an area, there’s something called claim surge where all of the sudden there’s this rebuilding activity in a certain market and the cost of repairs go up,” Peters said. “After a disaster the cost to replace a $250,000 home might be $350,000.”
  • Buyer beware if you shop for lower rates. “Generally speaking, there’s not a lot of variability on price,” Peters said. “If there is, it makes you wonder why one carrier is so much lower than everyone else. They may be excluding something.”
  • Save receipts for big ticket items like TVs and furniture. You’ll need to substantiate the losses to your insurance company and possibly Uncle Sam come tax time.
  • Work with a reputable insurance agent to cover your needs. Your financial advisor can likely recommend several trusted agents.



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