How About Those Disaster Losses?

What? You haven’t declared them yet?
BY: ORLANDO GOTAY

When Hurricane Patricia came up, I immediately thought of the many friends and acquaintances that live and own property right along the track of the storm.  Luckily Patty turned out to be almost a no show, but there were some material losses. And what about all your losses in Odile? You did claim those on your U.S. taxes didn’t you? For federal income tax purposes, some losses may be claimed as a deduction on your federal return.

For U.S. persons, casualty and theft losses in Mexico are deductible in one’s federal return. 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 type property affected was not income producing (originally deductible, usually by being used in a trade or business).  In the past, Mexico has issued special decrees easing the rules somewhat with regards 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 U.S. 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 regards to losses from casualties and thefts.  Begin collecting documentation as soon as the loss occurs! Yes, you’re already late, so get cracking.

To be able to claim a deduction, you must have filed claims with  your insurance carrier.  Annual loss deductions are also limited by one’s adjusted gross income, (AGI), 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 $2500. 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.

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.