RELIEF FOR HURRICANE/TROPICAL STORM IRENE VICTIMS
In late August, Hurricane/Tropical Storm Irene ripped through much of the East Coast leaving a wake of storm and flood damage. Parts of North Carolina, Maryland, New York, New Jersey, Pennsylvania, New Hampshire, Massachusetts, Connecticut, Vermont and Puerto Rico have been declared federal disaster areas by the president. The specific counties of each state and territory that have been declared federal disaster areas are available here.
As residents of Nashville, Tennessee, we can empathize with your communities, having ourselves experienced horrendous flooding in May of 2010. In 2010, many of our friends, colleagues and regional neighbors found themselves with homes and businesses destroyed by flood waters and soon after discovered that their insurance policies would not cover the damage caused by flooding. Therefore, we became familiar with the tax and FEMA rules and wish to share some of those rules with you as a starting point for our distant neighbors in need.
If you suffered an uninsured or underinsured loss of property due to Hurricane/Tropical Storm Irene in a county included in the federally declared disaster areas, 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. Furthermore, the IRS has granted extensions to October 31, 2011, for most returns that were due after the date of the Hurricane/Tropical Storm and before October 31, 2011.
Federal assistance may be available to assist disaster area victims in those counties designated as a federally declared disaster area eligible for individual assistance (See here for information on whether your county is 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. General information on FEMA Assistance and the application process can be found in the “Applicant’s Guide to Individuals and Household Program” at www.fema.gov/assistance/process/guide.shtm. For area specific information, please find your state and county at here.
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 year taxpayers, cannot be filed until after December 31, 2011. Significantly, casualty losses incurred in 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 return becomes irrevocable 90 days after the filing of the amended return or the 2010 return claiming the 2011 casualty loss.
Please note that legislation has been proposed which, if passed, would make the tax law regarding disaster losses more favorable for 2011, providing additional relief. Please check with your tax advisor before the end of the year to determine the status of the legislation.
Taxpayers desiring to claim disaster losses on their 2010 return should put the Disaster Designation “[Name of Your State]/Hurricane [or Tropical Storm, as applicable in your county] Irene” 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 the casualty 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.
Extensions of Time to File Returns
The IRS has extended the deadline for most returns of individuals and businesses located in the federally declared disaster areas which were originally due on after the first date of the “incident period” for the applicable state (see here) and before October 31, 2011, to October 31, 2011. These returns would include income tax returns of corporations who had requested an extension of time to file to September 15, 2011 and income tax returns of individuals who had requested an extension of time to file to October 15, 2011. Additionally, the IRS has announced that tax return preparers who are located in a Hurricane/Tropical Storm Irene evacuation area or an area subject to a severe weather warning because of Hurricane Irene have until September 22, 2011 to file returns otherwise due on September 15, 2011. This extension for tax return preparers does not require that the area where the tax return preparer is located be declared a federal disaster area and does not require that the taxpayer be located in the area affected by Hurricane/Tropical Storm Irene (only the tax return preparer).
For more information, please contact Leigh Griffith, Shane Morris, or any member of Waller Lansden Dortch & Davis, LLP’s 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.