Get disaster relief from the IRS

And Tom didn't have to wait to file the amended return. He submitted it as quickly as he could after the major disaster was declared instead of waiting until the 2015 filing season to claim the losses on his 2014 return. As soon as he completed the revised tax paperwork and got it to the IRS, the disaster-related refund was on its way to Tom so he could put the tax cash to work repairing his home.

Tom, of course, carefully considered his filing options and ran the tax numbers for 2013 and projections for 2014, when his property was actually damaged by the rising waters. If he had not been in such dire need of post-flood cash, he could have waited. Depending on your circumstances, you might find it more worthwhile from a tax standpoint to claim disaster losses in the year they occurred.

Cleanup 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 strikes.

Keep 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.

But 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.

In 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.

The IRS notes that expenses for repairs should take care of the damage only. You can't have the repair crew improve on the original state of your property.

Record-keeping requirements

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.

The 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.

You should be able to document:

  • The type of casualty and when it occurred.
  • That the loss amount claimed was a direct result of the casualty.
  • That you were the owner of the property or, if you leased it, that you were contractually liable to the owner for the damage.

The 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.

Holding 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.

And 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.

Other filing rules

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.

And 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 mudslides.

You 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 natural calamity.


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