In a Disaster, Help May Arrive at Tax Time

I saw this article on HouseLogic website and thought it was very good information, especially when we have had damaging storms this year.

September 13, 2011 from HouseLogic

In recent months, home owners across the country have been forced to flee their homes to escape tornadoes, hurricanes, wildfires, and other harbingers of doom. Now comes the cleanup, and it won’t be cheap.

Recovery will be particularly costly for thousands of families in the Northeast whose homes were flooded by Hurricane Irene. Standard home owners policies don’t cover flood damage, and only a fraction of home owners in New England have federal flood insurance.

You may, however, get some relief when you file your tax return. Personal casualty losses are deductible, if certain conditions are met:

  • The loss was caused by a sudden, unexpected, or unusual event. Hurricanes, wildfires, floods, and other natural disasters fit into this category, says Melissa Labant, tax manager for the American Institute of Certified Public Accountants. Losses that stem from a long-running problem aren’t deductible. For example, you can’t deduct damages from a termite infestation because the IRS assumes the termites have been feasting on your house for awhile.
  • The damages weren’t covered by insurance. Your deduction is limited to your unreimbursed casualty losses. This can create problems for home owners who suffer losses late in the year, because their claims could still be pending when it’s time to file their taxes, Labant says. Because Irene occurred in late August, most victims should know by April whether they’ll be reimbursed for losses, Labant says. If you’re still wrangling with your insurer next spring, consider requesting an extension to file your return.
  • Your losses are sufficient to overcome reductions required by the IRS. First, you must reduce the amount of your loss by $100. Then, you must shrink it by 10% of your adjusted gross income. For example, suppose your loss after insurance reimbursement was $2,000, and your AGI the year it occurred was $29,500. You would be ineligible to claim the deduction because your loss, after the reductions, would be zero.
  • You must itemize. In 2008 and 2009, Congress allowed home owners who claimed the standard deduction to deduct casualty losses (it also eliminated the 10% rule for home owners in federally declared disaster areas). That exception expired last year, Labant says. Unless Congress votes to reinstate the 2008-2009 rules, victims of this year’s disasters will have to itemize to deduct their losses.

That could be an issue in Texas, where wildfires have destroyed more than 1,000 homes. Texas doesn’t have a state income tax, which means many residents may not ordinarily have enough deductions to itemize, Labant says.

If you usually claim the standard deduction but suffered a large casualty loss this year, calculate your tax returns both ways to see which delivers the lower tax bill, she says. Tax software or your tax preparer can do this for you.

Victims of disasters in federally declared disaster areas have two choices: They can deduct their casualty loss in the year in which it occurred, or claim the loss on the return for the prior year.

For example, if your home was flooded by Hurricane Irene, you can claim the loss when you file your 2011 tax return next year, or claim it on your 2010 return. Taxpayers who filed for an extension until Oct. 17 still have time to claim the deduction on their original 2010 return. If you’ve already filed your 2010 tax return, you can claim the deduction by filing an amended return.

Claiming the deduction for 2010 means you’ll get your money more quickly, but that shouldn’t be your only consideration, Labant says. Did your income decline this year? Due to the AGI test, you may be better off claiming the deduction in 2011. To learn if your home is in a federally declared disaster area, go to the Federal Emergency Management Agency website, www.fema.gov.

Other relief

A deduction isn’t the only tax relief available to disaster victims. You may also have more time to file or pay your taxes. Earlier this month, the IRS announced several extensions for individuals and businesses in areas affected by Hurricane Irene:

  • Businesses and corporations that received an extension to file 2010 returns by Sept. 15 have until Oct. 31 to file.
  • Individuals and businesses that received an extension to file their 2010 return by Oct. 17 also have until Oct. 31 to file.
  • Taxpayers who owe estimated payments for the third quarter, ordinarily due Sept. 15, have until Oct. 31.

For more information, go to irs.gov.

Please be sure to let me know if you have any questions!