On April 28, 2011, the President declared parts of Alabama a federal disaster area as a result of the severe storms, tornadoes, straight-line winds, and flooding that struck the area - http://www.whitehouse.gov/the-press-office/2011/04/28/president-obama-signs-alabama-disaster-declaration. Specifically, the disaster area, as of May 2, 2011, includes the Alabama counties of Autauga, Bibb, Blount, Calhoun, Cherokee, Choctaw, Cullman, Dekalb, Elmore, Etowah, Fayette, Franklin, Greene, Hale, Jackson, Jefferson, Lawrence, Limestone, Madison, Marengo, Marion, Marshall, St Clair, Sumter, Tallapoosa, Tuscaloosa, Walker and Washington. Additional counties could be added to the disaster area as the damages in other areas continue to be surveyed by the Federal Emergency Management Agency (FEMA). Counties in Mississippi and Georgia have also been declared federal disaster areas. If you suffered a loss of property due to the storms in a county included in the federally declared disaster area that was uninsured or underinsured, you could qualify for assistance from FEMA. Additionally, you could be able to claim a disaster loss from the 2011 storms on your 2011 or 2010 federal income tax return.
Federal assistance may be available to assist Alabama disaster area victims in those counties designated as a federally declared disaster area eligible for individual assistance. Available assistance includes grants for temporary housing and home repairs, low-cost loans to cover uninsured property losses and other programs. The program is administered by FEMA, and you can apply for assistance immediately at www.disasterassistance.gov or by calling 1-800-621-3362. In addition, a FEMA release on applicable federal individual and business aid for victims in the disaster counties can be found at www.fema.gov/ Release Number HQ-11-043 Factsheet (April 29, 2011), and the "Applicant's Guide to Individuals and Household Program" can be accessed at https://www.fema.gov/help-after-disaster.
Claiming Disaster Losses against Federal Income Tax
Taxpayers are generally allowed a deduction in calculating their federal income tax liability for casualty losses suffered in storms regardless of whether the casualty was in a county declared a disaster area. If the casualty loss creates a net operating loss, it can generally be carried back two years and forward 20 years. However, individuals (and certain small businesses with respect to disaster losses) may carry back these net operating losses three years. The ability of a taxpayer to use the casualty loss to offset taxable income is subject to a number of limitations.
The rules for claiming casualty losses with respect to personal use, non-business, non-income-producing property are summarized below:
- Casualty loss is calculated to equal the lesser of the adjusted tax basis of the property or the decrease in the fair market value as a result of the casualty, net of any insurance proceeds or other reimbursements received or expected to be received. Grants, including FEMA grants, that are required to be used to replace or repair property would be considered reimbursement and would have to be subtracted from any loss in calculating the amount of casualty loss for federal income tax purposes. Grants that are not for the purpose of replacing damaged property or unrestricted grants are not subtracted in determining the amount of a casualty loss.
- The casualty loss calculated above is then reduced by $100. This $100 reduction is per casualty event and not per item of property lost.
- After the $100 reduction, you must deduct from your total casualty losses for the year an amount equal to 10% of your adjusted gross income for the year. Thus, if your adjusted gross income is $150,000, and you suffered an uninsured loss of $20,000, after the $100 deduction described above and the 10% limitation, you would only be entitled to a $4,900 casualty loss deduction.
- The casualty loss is an itemized deduction. Casualty losses are not subject to the overall limitation on deduction of itemized deductions. However, taxpayers who claim the standard deduction cannot take a casualty loss deduction.
For business and income-producing property, casualty losses are not subject to the $100 threshold and 10% of adjusted gross income limitations that are applicable to personal-use property. Further, if business or income-producing property is completely lost or destroyed, the full adjusted tax basis is allowed as a casualty loss deduction without the need for ascertaining the fair market value of the property prior to the casualty.
Ordinarily, casualty losses, whether incurred in business or personal use, are required to be claimed in the tax year in which they are incurred. Accordingly, casualty losses resulting from the April 2011 storms would typically be claimed on a taxpayer's 2011 federal income tax return, which for calendar tax year taxpayers, cannot be filed until after December 31, 2011. Significantly, casualty losses incurred in certain federally declared disaster areas may be treated as if they occurred in the preceding tax year and claimed in that year on the original or an amended return for the previous year. The advantage of claiming a disaster loss in 2010 rather than 2011 is that the victim can obtain a refund of 2010 taxes paid earlier than if the loss is claimed in 2011. However, depending on the taxpayer's individual tax situation, the benefit of the deduction may be more or less in 2011 than in 2010. Each individual must carefully assess their personal tax situation in making the determination of whether to amend their 2010 return or wait to claim the disaster loss on their 2011 tax return. The 2010 return can be amended for the federally declared disaster loss occurring in 2011 until the due date (without extensions) of the 2011 return. However, the election to claim the loss on the prior year's return becomes irrevocable 90 days after the filing of the amended return or the 2010 return claiming the 2011 casualty loss.
Taxpayers desiring to claim disaster losses on their 2010 return should put the Disaster Designation
"Alabama/Severe Storms, Flooding, Straight-Line Winds and Tornadoes" at the top of the return to expedite processing. If the 2010 return has already been filed, a disaster loss may still be claimed in 2010 by filing an amended return with the Disaster Designation. A taxpayer must also attach IRS Form 4684, calculating the casualty loss, to its original or amended return. The 2010 Form 4684 is available at http://www.irs.gov/pub/irs-pdf/f4684.pdf. For the instructions, see http://www.irs.gov/pub/irs-pdf/i4684.pdf. Additional information on disaster losses can be found in IRS publications at http://www.irs.gov/publications/p547/index.html and http://www.irs.gov/pub/irs-pdf/p584.pdf.
Because it will be necessary for taxpayers to establish the fair market value of the property before and after the casualty (except in the case of completely lost or destroyed business or income-producing property) taxpayers should consider whether it will be necessary to obtain appraisals. Taxpayers should also retain all receipts related to repairs of damaged property as the cost to restore the property can be used, under certain conditions, to establish the decrease in fair market value caused by the casualty.
For more information, please contact Larry Childs, Leigh Griffith, Shane Morris, Charles Trost, or any member of the Waller Lansden Tax Practice at 800-487-6380.
WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT ANY STATEMENTS CONTAINED HEREIN ARE NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU OR ANY OTHER TAXPAYER, FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.