DEDUCTING 2021 FREEZE DAMAGE ON YOUR 2020 TAX RETURN
The February 13–17, 2021 North American winter storm, unofficially referred to as Winter Storm Uri, was a major winter and ice storm that had widespread impacts across the United States, Northern Mexico, and parts of Canada. Over 9.9 million people in Texas alone suffered blackouts, little or no water, and burst pipes due to Winter Storm Uri. Damages from the blackouts were estimated at $195 billion, making them the costliest disaster in Texas history.
As a consequence of Winter Storm Uri, President Joe Biden declared Texas a major disaster (DR-4586) under the authority of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 et seq. (the “Stafford Act”). This means you can deduct your uncompensated damages on your tax return regardless of whether you itemize or not. There is also a special provision in the Tax Code that lets you claim your 2021 freeze damages on your 2020 return, if you like, instead of waiting to claim then on your 2021 tax return. IRC § 165(i)(1) provides that “…any loss occurring in a disaster area and attributable to a federally declared disaster may, at the election of the taxpayer, be taken into account for the taxable year immediately preceding the taxable year in which the disaster occurred.”
Claiming the freeze loss on your 2020 return speeds up the tax savings you get from the deduction. If you have not yet filed your 2020 Form 1040, you can simply claim the freeze damages on your original Form 1040 for 2020. If you have already filed your 2020 return, you can still elect to claim the losses on your 2020 return, but you will have to file a Form 1040-X instead. The good news is that this can be done electronically rather than on paper. Remember, your freeze loss deduction cannot exceed the actual loss you incurred less any insurance reimbursement you expect to receive at the time you file your tax return.