How About Those Disaster Losses?
By Orlando Gotay
When Hurricane Patricia came up, I immediately thought of the many friends and acquaintances who live and own property right along the track of the storm. Luckily there was no loss of life, but there were some material losses. And of course, it is important to know that for federal income tax purposes, some losses may be claimed as a deduction on your federal return.
To be able to claim a deduction, you must have filed claims with any applicable insurance. The amount of the loss is then reduced by insurance reimbursements you receive or expect to receive. Annual loss deductions are also limited by one’s adjusted gross income and by any value left in the property (salvage value). The annual loss allowance has a “floor” of 10 percent of AGI. If your AGI was, say, US$25,000, then the “AGI floor” is US$2,500. Only the loss portion exceeding that amount is deductible. Also, one must subtract US$100 from the computation for each loss event. The Internal Revenue Code requires both the “per event” US$100 and the “annual” 10 per cent “haircuts” from loss computations.
In the cases of theft, the rule is similar. You must be able to substantiate the loss (for example, with police reports) and its extent (a good starting point is documents supporting what the item cost you).
For US persons, casualty and theft losses in Mexico are deductible in one’s federal return with the general outline above. IRS Form 4684 and its instructions have more details. For personal (nonbusiness) losses, the deduction is an itemized deduction on Schedule A of the federal return.
For Mexico income tax, however, things are less exciting. Generally speaking, Mexico income tax law does not allow loss or theft deductions if the property affected was not income producing (originally deductible, usually by being used in a trade or business). In the past, Mexico had issued special decrees easing the rules somewhat, with regard to due dates of tax payments and tax compliance, to benefit persons affected by large storms or disasters. As I read previous decrees, I feel they are just temporary measures that do not lead to any permanent tax benefit, unlike the US rules. As of today, no ruling has yet come out on Patricia, although one may be forthcoming.
Bottom line: A tax benefit may be available with regard to losses from casualties and thefts. Begin collecting documentation as soon as the loss occurs!
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court, and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at email@example.com.