Standard homeowners insurance policies don’t cover flood damage, which is why flood insurance is so important. But flood insurance can be pricey, especially if you live in an area that the Federal Emergency Management Agency (FEMA) designates as having a high risk for flooding.
The median cost of flood insurance through the National Flood Insurance Program (NFIP) is $786 per year.1 And homeowners in flood zones may pay even more.
If you’re looking to defray rising insurance costs, here’s what you need to know about flood- and home-related tax breaks.
As a homeowner, you can’t deduct flood insurance premiums from either your federal or state income taxes.
But businesses may deduct the cost of flood insurance and other types of insurance coverage on their federal income tax return. So if you run a home-based business, you may be able to deduct some of your flood insurance premiums.
The portion of your flood insurance premiums that’s tax-deductible depends on how much of your home you use for business and how much is primarily for personal use.2
For example, a freelance writer with a home office could only deduct the portion of flood insurance premiums (or homeowners insurance premiums) that covers their office. But a homeowner who uses their home as a rental property may be able to deduct the full cost of their flood insurance premiums.
IRS rules allow you to take a casualty loss deduction for flood damage if you meet certain criteria:
A federally declared disaster caused the flood damage to your home. If an ordinary rainstorm causes some water damage in your basement, you won’t be able to take a casualty loss deduction for it. But if your basement floods from a hurricane, and the federal government designates the storm as a disaster, you may be eligible for a federal income tax deduction.
The damage to your home is more than your insurance reimbursement, or you didn’t have flood insurance at all. But if your insurance policy reimbursed you for all your flood damage losses, you can’t claim a deduction.
The total cost of damages, less $100, is greater than 10% of your adjusted gross income (AGI). To calculate how much you can deduct, subtract $100 from the total loss after your insurance reimbursement. Then subtract 10% of your AGI from the resulting number. If you come up with a positive number, you can deduct that amount from your taxes.
Deductions reduce your taxable income — the portion of your annual wages that’s subject to federal income tax. If you qualify for a casualty loss deduction, it could help reduce the amount of tax you owe.
If you’re uninsured or don’t have sufficient flood insurance coverage to reimburse your casualty losses, you may qualify for tax deductions based on the amount of your loss.3
Just keep in mind that any reimbursement you receive for qualifying damage to your home will reduce the amount of your deduction. And the IRS caps the amount you can deduct for a casualty loss.
Let’s say a federally declared disaster floods your home, causing $35,000 in damage. Your flood insurance company reimburses you for $15,000 of the cost.
To determine if you can take a casualty loss deduction, subtract $100 from the $20,000 in unreimbursed losses, which gives you $19,900. Next, calculate 10% of your AGI. If your AGI is $75,000, 10% is $7,500, which is less than your $19,900 in unreimbursed losses. Subtract $7,500 from $19,900 to get your maximum deduction of $12,400.
Not every instance of flood damage qualifies for a casualty loss tax deduction. Fortunately, several other federal and state tax deductions are available for homeowners and people with a home office. Just remember that most of these tax breaks require you to itemize your deductions on your federal income tax return.
To take advantage of these homeowner tax breaks, you’ll need to file the appropriate tax forms. Depending on which deduction or credit you claim, here are the forms you’ll need:
If you’re interested in using tax deductions to defray homeownership costs, the answers to the following common questions can help.
A tax deduction reduces the amount of income that you must pay tax on. By reducing your taxable income, a deduction lowers the amount you owe in taxes. Not every home-related expense is tax-deductible.
If you qualify for a deduction, you can take one for flood-related casualty losses and other disaster losses during the tax year the flood occurred.
The tax code treats flood insurance as a personal expense for homeowners. Businesses can deduct the premiums for not only flood insurance but also fire and theft insurance. Landlords can deduct flood insurance for residential rental properties because they’re considered business owners and an insured residence isn’t for personal use.
If you run a home business or have a home office, you may be able to deduct certain expenses related to your home-based business.
No. Just like flood insurance, the tax code treats your homeowners insurance as a personal expense, which means you can’t deduct homeowners insurance costs.
Only self-employed homeowners who use a portion of their personal residence for business purposes may deduct homeowners insurance or flood insurance costs. How much you can deduct depends on how much of your home you use for business and how much is primarily personal use.
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