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  Personal Finance Tips from Nancy Dunnan

Irene and Tax Deductions

IRS Extensions

Now, Americans hit by storms and fires are in the clean-up phase. In relationship to the problems homeowners face, earlier this month the IRS announced it was granting extensions -- to individual taxpayers and businesses affected by Irene. That means if you received the standard extension to file your 2010 return by October 17, you now have until October 31 to do so. For full details go to: www.IRS.gov.

Deductions

As you know, the standard homeowners insurance policy does not cover flood damage. You need to have the special federal flood insurance coverage. For details on flood insurance, which is overseen by the Federal Emergency Management Agency go to: www.fema.gov.

However, in some circumstances you can deduct personal casualty losses, such as the cost of repairs. Discuss these with your tax preparer:

(1) To be deductible, the loss must be caused by a "sudden or unusual event." But if you've had a long-term problem, such as a leak in your basement, you're out of luck.

Note: While homeowners policies don't cover flood damage, many cover other types of water damage. For instance, they often pay for damage from rain that comes in through a hole in your roof or even through a broken window - as long as the hole or broken window was caused by a hurricane (or other disaster covered by your policy).

(2) Your deduction is limited to damages that are NOT covered by your insurance policy.

TIP: If by next April 15 you still do not know if your loss will be reimbursed by your insurance company, fill for an extension.

(3) To declare a deduction, you must itemize. If you are one of thousands of taxpayers who claim the standard deduction rather than itemize, have your tax preparer run calculations for both scenarios. If you had a huge loss it may pay for you to itemize on your 2011 return.

(4) You'll need to know your Adjusted Gross Income (AGI) when doing all calculations. That's because the IRS insists that you (a) reduce the amount of your loss by a flat $100 and (b) that you further reduce it by 10% of your AGI.

(5) You'll also need to know if your home is in a federally declared disaster area. If it is, then you can either deduct your allowable loss in the year in which it happened or on the return for the prior year.

TIP: To find out if your home is in an area declared as a federal disaster, go to: www.fema.gov.

For additional information, go to the Insurance Information Institute's website at: www.iii.org.