It was about four months ago when President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 that waived the “in excess of 10percent of AGI” requirement to deduct uncompensated losses that were a result of Hurricanes Harvey, Irma, and Maria from your 2016 or 2017 tax returns if you were in a federally declared disaster area. For everyone else who suffered damage, they were able to claim an itemized deduction for property and casualty losses that were not reimbursed by insurance if caused by a natural disaster. The loss was limited to amounts that exceed $100 plus 10 percent of your adjusted gross income.
However, with the Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017, taxpayers can only take a deduction for personal casualty losses if the loss is attributable to a presidentially declared disaster for tax years beginning in 2018.
What this means to you is that you need to make sure your insurance is up to speed. Disasters happen to people regardless of income or wealth. No one can truly predict when a fire will start or if the next hurricane will take a turn toward the house you just bought. Furthermore, not all disasters are a result of a storm, earthquake, or wildfire — something likely to warrant a federal declaration. If your house were broken into and valuable items stolen, or if your heating system caused a fire, you can no longer deduct your out-of-pocket costs.
It’s common for people to look at insurance as a gamble. You pay for it and may never use it. When money is tight or you have other priorities, you may consider carrying a higher deductible to save on premium costs, and that can be a good financial decision, depending on your situation. However, if you don’t have the means to weather a loss, you need to fully understand your insurance coverage.
Most standard homeowners insurance policies provide coverage for damage caused by wind, snow, ice, freezing rain, and severe temperatures. Regardless, you still need to review your homeowners policy to know for certain which perils are covered. Understand whether your policy covers actual cash value, or if you have replacement cost coverage. Furthermore, if you have replacement cost coverage, you need to know if the policy will cover your damaged items at today’s prices. If you are displaced during a disaster, you need to know what limits your policy will pay for hotel stays or a rental home.
It is extremely important to understand that standard homeowners insurance policies generally do not provide coverage for flood damage. According to FEMA (Federal Emergency Management Agency), an average one-story home of 2,500 square feet that floods with just one inch of water could see a loss around $27,000. Without insurance or a federally declared disaster, that cost could be 100percent out of pocket, with no way to recoup your loss through a tax deduction. Flood insurance can pay regardless of whether or not there is a Presidential Disaster Declaration.
Now for many homeowners, flood insurance may be over insuring; therefore, many insurance companies offer increased water damage endorsements that can be added to the standard policy. These can also cover any seepage that backs up through sewers or drains.
Remember, insurance is a tool that is designed to protect all that you’ve worked for. It is an important element in a comprehensive financial plan to ensure a disaster doesn’t derail your financial goals. Your insurance coverage should be reviewed every year to ensure your policies meet your evolving needs.