Hurricane Katrina casualty losses.

According to ITL-2005-119, taxpayers who suffered casualty or theft losses as a result of Hurricane Katrina can take advantage of eased loss limits.

Background: Ordinarily, a deduction for a personal casualty or theft loss is computed by reducing each loss by $100 and aggregate losses by 10% of adjusted gross income. Only the excess over the $100 and 10% limits is deductible. The new law removes these limits for Hurricane Katrina losses, so that the entire amount is deductible.

Eligibility: To qualify, a loss must be attributable to Hurricane Katrina and have occurred after Aug. 24, 2005, in the Presidentially declared disaster area. The $100 and 10% limits still apply to losses not caused by Hurricane Katrina.

Like all casualty and theft losses, Hurricane Katrina losses can only be claimed as an itemized deduction. In addition, no deduction is allowable for any part of a loss for which the taxpayer receives (or expects to receive) insurance or other reimbursement.

Further, losses are generally deductible only in the year the casualty occurred or the theft was discovered. However, because a Hurricane Katrina loss is a disaster loss, it can be deducted on 2004 returns. The $100 and 10% limits will not apply to that loss in redetermining 2004 tax. Taxpayers who have already filed 2004 returns can claim the loss by filing an amended return for that year. However, claiming the loss on a 2005 return could generate greater tax savings.

Taxpayers filing or amending their 2004 return and whose only casualty or theft losses to personal-use property were caused by Hurricane Katrina, should write in red ink "Hurricane Katrina" at the top of Form 1040X, Amended U.S. Individual Income Tax Return. They must also attach the 2004 version of Form 4684, Casualties and Thefts, writing "Hurricane Katrina" on the dotted line next to line 11 and entering "0" on lines 11 and 17. Special rules apply for taxpayers with both Katrina-related and non-Katrina-related casualty or theft losses. For 2005, Form 4684 is being revised to reflect the new law for Hurricane Katrina losses.

Information on disaster areas can be found at the Federal Emergency Management Agency's website, www.fema.gov/ news/disasters.fema.

Taxpayers affected by Hurricane Katrina can call the IRS disaster hotline at [phone].

Lesli S. Laffie, J.D., LL.M.