Water is your friend in countless ways, but not when it immerses the floors and furnishings of your nest. When this happens, you turn to your insurance provider to replace your floors, walls and possessions. Even when your insurer pays, you're expected to eat some of the costs out of your own pocket -- called a deductible. If you have losses that you can't totally recover, you can turn to the tax code for some relief.
Damage From Sudden Events
Usually, home floods can lead to tax deductions because they result from storms or sudden events, such as a ruptured pipe. While the water damage to your floors, furniture, electronics and other items is deductible, you don’t get to claim the damage to the pipe. Deterioration in your home is not considered a sudden event.
Does Insurance Coverage Me?
The size of your casualty tax break depends on whether your loss is covered by homeowners or flood insurance. Review your policy or call your insurance agent for the answer. As a rule of thumb, if water comes from the pipes or through a roof or wall, then you really have water damage rather than flooding. However, if a heavy storm causes water to enter your home, it’s considered a flood because the water comes from the ground. Homeowners policies typically cover water damage, but not floods. For the latter, you need flood insurance.
Just the Deductible Counts
If insurance covers your loss, you can only claim your insurance deductible on your taxes. To the extent you’re reimbursed, or could have been reimbursed for the damages, you haven’t really suffered a casualty loss. Thus, the tax write-off is limited by the insurance check you get or could have received if you filed a claim, so you won't get a larger break if you forego the insurance claim. In fact, the IRS might disallow the deduction altogether -- except for the deductible -- if you don't at least try to get money from your insurer. The deductible can be shaved from your taxable income even if you don't file an insurance claim.
But Do You Itemize?
The insurance deductible won’t lower your taxes unless you muster enough itemized deductions. For the 2013 tax year, the standard deduction is $6,100 for single or married filing separately, and $12,200 for married filing jointly. Since you must choose either the standard or itemized deductions, the latter will benefit you only if they exceed the standard deductions. Complete a Form 4684 to figure your actual casualty loss. Report the loss from Form 4684 on line 20 of the Schedule A along with your other itemized deductions.
- IRS.gov: Tax Topics -- Topic 515 -- Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas)
- IRS.gov: Publication 547 -- Casualties, Disasters, and Thefts
- IRS.gov: Instructions for Form 4684
- National Association of Insurance Commissioners: Consumer Alert: Five Reminders About Your Insurance Coverage
- IRS.gov: Publication 17 -- Your Federal Income Tax -- Standard Deduction
- IRS.gov: Schedule A (Form 1040) -- Itemized Deductions
- IRS.gov: Form 1040 -- U.S. Individual Tax Return
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.