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Get disaster relief from the IRS

Taxes » Tax Deductions » Disaster Relief From The IRS

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.

Taxpayers 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.

However, 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.

When the 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.

Major disaster 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 have the option of choosing which tax year to claim the disaster losses. Depending on when the catastrophe occurred, filers can amend a previous year's 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 losses 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.

Not 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. You also have to subtract any insurance money you got for the loss.

Tax experts 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.

So evaluate 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.

Paperwork 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.

The first step is gathering the proper forms. To claim disaster losses, you must file the long Form 1040 individual tax return plus 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 1040X instead.

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.

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