government help for disaster victims
After people endure a disaster, taxes are probably
the last thing on their minds. But tax laws do offer some help for
loss victims. And victims of a presidentially declared disaster could use their tax filing to obtain much-needed cash.
who itemize are allowed by the Internal Revenue Service to deduct casualty losses
-- "the damage, destruction or loss of property from an identifiable event that
is sudden, unexpected or unusual." Usually, this means waiting to claim the loss
on your next income tax filing.
when a house, car or business is damaged or destroyed by an event deemed a major
disaster by the president, the wait for tax refund money attributable to disaster
losses is cut dramatically. In these extreme cases, taxpayers can deduct their
losses in the tax year before the event happened by filing an amended return.
Federal Emergency Management Agency, or FEMA, announces that the
president declares major
disasters in certain areas, usually in the wake of a major storm, the way is
cleared for special federal help, including tax options.
Disaster-related tax relief generally includes extended
filing deadlines and easing of related penalties for individuals
and businesses located in the designated disaster areas. The relief
also usually applies to those whose tax records are located in the
damaged regions (at an accountant's office, for example), and workers
from any location who are there providing help to victims.
In addition, taxpayers in federal disaster areas also have the
option of choosing which tax year to claim the disaster losses. Depending on which the catastrophe occurred, filers can amend a previous-year tax return and claim the catastrophic
losses they suffered on the old return. In many instances,
amended filing will make the individual eligible for an immediate
tax refund -- money that could be used to live on or begin repairs.
This often is the case for filers who didn't itemize deductions
the previous year; if the total of the casualty loss and any other
itemized deductions will amount to more than the standard deduction
they originally took, refiling is generally to their advantage.
Even taxpayers who did itemize might find an amended return worthwhile
if the disaster damage produces more than originally deducted.
the best move for everyone
While the option to time-shift federal
disaster casualty losses to the previous year is a great advantage
for some, it's not the best move for all taxpayers.
Some storm victims might find that while their losses are substantial, they aren't sufficient to meet two tax-law limits on casualty claims. First you must reduce the amount you can claim by $100. Then, you have to reduce the total of all your casualty losses by 10 percent of your adjusted gross income.
also note that people who had very high taxable income the year in which
they could claim the losses and expect very low income the year
of the disaster might be able to deduct more of their losses by
waiting until they file their return the following year.
The deadline for choosing this option usually is the due date of a filer's current year return.
your individual circumstances -- tax, damage and financial recovery
needs -- carefully. And be sure that the calamity is a certified
federal disaster to get the immediate relief.
you'll have to file
If you meet the loss limits, the process to
claim them is the same regardless of which tax year you choose to file the claim.
first step is gathering the proper forms. To claim disaster losses, you must file
the long Form
1040 individual tax return, Form
4684 to figure and report your casualty loss and Schedule
A to itemize your loss deduction. If you need to file an amended return to
claim losses, use Form
Then determine how the damage has hurt your
property's fair market value. This is a two-part valuation: What your property
was worth immediately before the catastrophe and what it's worth after.
The predisaster value is your "adjusted basis."
For homes, this usually is the cost of the property plus certain
adjustments such as improvements that add to the structure's value;
for vehicles or other personal property, it may be depreciation
that reduces its value. Then get an appraisal for the post-storm
value of the property and compare it with your adjusted basis. The
difference between the two amounts is your loss from the casualty.
the loss is determined, use Form 4684 to figure the deductible amount of your
casualty loss. You must reduce the initial loss claim amount by any insurance
or other reimbursement you have received. If you have insurance on your property,
you must submit a claim in order to use the damage to it as a casualty loss. In
other words, you can't decide you don't want to pay the deductible your insurance
would require and then use the total, unreimbursed loss amount as your casualty
claim. And all insurance payments must be used to repair or replace your property,
or any excess not used for these purposes could be a taxable gain to you.
the IRS requires you to further reduce your loss by $100. Finally, you must reduce
the total yet again by 10 percent of your adjusted gross income to get to your
final casualty loss deduction.
cost of damage
worksheet shows the computations that a hypothetical Tom Taxpayer, who suffered
through a federally declared flood disaster, had to make. The water substantially
damaged Tom's home, the property inside and his car. Insurance covered only a
part of the losses.
Tom's adjusted gross income
is $60,000, and that's what he uses to figure his casualty deduction.
Tom was off work -- and without pay -- for the week that his employer
was closed during a flood in July 2007. Unfortunately, Tom can't claim the
lost income. The IRS provides no deduction for missed wages, even
in the event of federal disasters.
House and land
Original Property Cost
2. Fair Market Value (basis) before disaster
3. Fair Market Value (appraisal) after disaster
4. Decrease in value
(line 2 minus line 3)
Smaller of line 1 or line 4
Loss after reimbursement (line 5 minus line 6)
8. Total loss (total
of line 7 entries):
9. Subtract $100
10. Loss after $100
11. Subtract 10% of
Adjusted Gross Income
12. Amount of casualty
it's time to figure out the "real money" value of your deduction. Remember: Your
deduction doesn't directly translate to the amount of whatever refund you will
receive. You must refigure your taxes using this new deduction (entered on Schedule
A and Form 1040X) to determine just how much you'll get back.
a single filer, decided to amend his 2006 tax return since he took
only the standard deduction of $5,150 when he filed that year. His much larger, disaster-related deduction amount should, depending upon
how much he paid in taxes that previous year, produce a
And he didn't have to wait to file the amended return. As soon as he completed the paperwork and gets it to the IRS, his disaster-related
refund will be on its way to Tom and he can put the tax cash to work repairing his home.
Tom, of course, carefully considered his filing options and ran the tax numbers for both 2006 and 2007, the year his property was acually damaged by the rising waters. If he had not been in such dire need of post-flood cash, he could have waited. Depending on Tom's circumstances, he might
find it more worthwhile from a tax standpoint to claim his disaster
losses in the year they occurred.
and repair costs
Tom was able to get
such a good tax result from his difficult situation because he kept track of what
he spent to clean up and repair his property, the main concerns after a disaster
in mind, however, that the tax laws won't allow you to specifically get back that
$5,000 you paid to have the carpets cleaned after the flood. There is no place
on Form 4684 for you to enter this expense and have it directly count as part
of your casualty loss deduction.
because your flooring was damaged by the floods, you can use what you spent to
repair it as a measure of how much your home's property value was reduced by the
storm. This in turn will give you a more accurate assessment of your property's
damage and the tax deduction value of the loss suffered.
Tom's case above, the $75,000 post-disaster value of his home takes the floor
damage into account. If the carpets didn't need the professional cleaning, then
his home might be worth $80,000. This would mean that the amount he could claim
as a casualty loss would be only $22,900 and his tax relief would be less.
IRS notes that expenses for repairs should take care of the damage only. You can't
have the repair crew improve on the original status of your property.
And even though
the IRS allows disaster victims some tax leeway, the agency still demands that
casualty losses, like every deduction, be substantiated and supported.
IRS does not require you to keep your records in a particular way, only that you
keep them in a manner that allows you and the IRS to determine your correct tax.
While you don't have to submit your documentation with your return, you should
keep your records handy and be able to show the following if asked:
type of casualty and when it occurred.
the loss amount claimed was a direct result of the casualty.
you were the owner of the property or, if you leased it, that you were contractually
liable to the owner for the damage.
simplest way to track loss substantiation is in your checkbook. There you can
enter income and loan or insurance reimbursement deposits along with all checks
written for expenses accrued in connection with your disaster loss. Be specific:
note amounts, sources of deposits and types of expenses.
on to other documents, such as receipts and sales slips, also can help prove a
deduction. Keep your records in an orderly fashion, such as placing documents
related to a particular event in a designated envelope, and, where applicable,
store them by year and type of income or expense.
don't forget your camera. Photographs showing the original condition of the property
and ones taken after the disaster struck can be helpful in establishing the condition
and value of your property.
When you do send in your
amended return, explain that the refiling was due to casualty losses incurred
in a federal disaster and attach Form 4684 to show how you figured your loss.
Be sure to specify the date or dates of the disaster and the city, county and
state where the damaged or destroyed property was located when the disaster occurred.
what if you thought you escaped, only to find out that the disaster was just a
bit slow in arriving? This might be the case if you live in a federal disaster
area and state or local officials decide that your home, even though it suffered
only minor damage, must be moved or torn down for public safety reasons, such
as ensuing mud slides.
still can take advantage of the casualty loss deduction as long
as the government-ordered demolition or relocation of a home is
issued within 120 days after the original federal disaster declaration.
It might be government contractors doing the damage this time, but
your resulting loss is treated just as if it were damaged in the