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How about Those Disaster Losses?

By Orlando Gotay, Tax Attorney

Hurricane Harvey and the ongoing flooding disaster made me think of friends and acquaintances who live and own property in the greater Houston area and even farther out. My heart goes out to them. I pray for speedy recovery.

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—even if you live overseas.

To be able to claim a deduction, you must have first filed claims with any applicable insurance. The amount of the loss for tax purposes 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% of AGI. If your AGI was, say, $25,000, then the “AGI floor” is $2,500. Only the loss portion exceeding that amount is deductible. Also, one must subtract $100 from the computation for each loss event. (The Internal Revenue Code requires both the “per event” $100 and the “annual” 10% “haircuts” from loss computations).

In the cases of thefts, 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 on one’s federal return with the general outline above. For personal (nonbusiness) losses, the deduction is an itemized deduction on schedule A of the federal return. No itemizing = no deduction.

For Mexico income tax, however, things seem to be even less generous. I understand that Mexico income tax law does not allow loss or theft deductions if the type of property affected was not income producing (originally deductible, usually by being used in a trade or business). In large storms or disasters, Mexico has issued special decrees easing the rules somewhat with regard to due dates of tax payments and tax compliance, to benefit affected persons.

Bottom line: A tax benefit may be available with regards to losses from casualties and thefts. Begin collecting documentation as soon as the loss occurs. IRS Publication 547, Casualties, Disasters, and Thefts, has all the details!

 

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. 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 U.S. expats in Mexico. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.

 

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