Get IRS help in disastrous times

June is almost over and I'm happy to note that no one has had to deal with even the hint of a hurricane yet.

But having lived in Florida for more than six years, including the horribly historic 2004 when the state was pummeled by four major 'canes, I know it's way too early to celebrate. Hurricane season runs through Nov. 30, and, as forecasters warn, it only takes one to cause all sorts of financial (and other) problems.

That's why the IRS is urging taxpayers to prepare for the storm season. It suggests you create a set of backup records -- bank statements, tax returns, home and health insurance policies, and the like -- and store that information electronically. If your information is just on paper, you can scan it and then download the data to a flash drive or CD. Then, when you get your power back, you have all the coverage info, policy numbers, etc., in one easy to carry with you place.

Why does the IRS care if we're prepared for storms? Because if you incur damage from an angry Mother Nature, you might be able to get some help from Uncle Sam.

In the event of a major disaster, one in which the president issues a special declaration, affected residents can file an amended tax return and get a potential refund more quickly to help start making repairs.

In addition, if you're in a major disaster area, you probably are going to get some tax relief from impending filing deadlines.

The IRS keeps track of major disaster areas that get special tax treatment. The latest additions to the list are storm and flood victims in Alabama and Missouri and folks who faced wildfires in Oklahoma.

Added IRS help in 2009: This year, a temporary tax law change also could make it easier for some filers to get tax help after a disaster.

Under the National Disaster Relief Act of 2008, filers no longer face the 10 percent adjusted gross income limitation on their claimed losses. They also can claim eligible losses even if they do not itemize.

One trade-off now, however, is that loss claims for folks in a presidentially declared disaster area now must be greater than $500, rather than the prior law of more-than-$100 (limit) in order to get the other more favorable tax treatment.

Relief for other losses, too: But you don't have to suffer through a major natural disaster to get IRS help. The tax code offers a remedy for all types of "routine" casualty losses.

This includes unfortunate events such as burglaries, thefts, vandalism and even, in some instances, auto accidents.

Neither the IRS nor I want you to have to use the tax code to recover from a calamity. But if you do face a loss, be sure you check into the possible tax help.

And take the IRS's advice and get ready in advance for unwanted events.

Some forgiven debt remains taxable

A New York Times story on how credit card companies are "settling delinquent accounts for substantially less than the amount owed" caught my eye.

I don't really care about the credit card issues; that's for my colleagues Ellen Cannon and Leslie McFadden to discuss on Plastic Rap.

What did catch my eye was what isn't in the story. There's no mention of the tax bills that await credit card customers who see a chunk of their card bills forgiven.

Yep, as I noted in a previous Bankrate story, one of life's terrible tax surprises is that the IRS considers forgiven debt as taxable income.

The guy who's the main example in the Times story was able to get his credit card bill cut in half. But going from more than $5,000 owed to paying half that -- $2,743-- means he's liable for the taxes on the forgiven amount.

If he's in the 25 percent tax bracket, that means he'll owe the IRS $685.75.

OK. I'll concede that less than $700 is much better than almost $5,000. But I'll bet he doesn't know that he's going to have a bigger tax bill come next April 15.

Most people aren't aware of this nasty little tax quirk.

A lot of them think that forgiven debt is tax-free. That misperception got a boost when the Mortgage Debt Forgiveness Act of 2007 became law. Under the measure, which subsequently was expanded, some homeowners who are granted forgiveness of mortgage debt don't have to pay taxes on that amount.

But there are some restrictions to the measure.

And it applies only to debt canceled in connection with your home, not your credit cards.

So if you can get your Visa or Mastercard or whatever credit card company to cut your bill, good for you. But know that you'll have a new creditor in its place: the IRS.