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Tax Breaks for Natural Disasters

IRS offers deductions, extensions and more to taxpayers hit by hurricanes, wildfires, floods, other calamities 

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After a disaster hits your area, dealing with damage to your home and property, and even the loss of a loved one or pet, will be all-consuming, devastating and draining. Filing your tax return or making estimated payments can be one more hassle to add to the heartache.

The Internal Revenue Service (IRS) recognizes the burden on taxpayers in disaster zones and offers assistance in various ways.

“Bad things happen to us. However, the tax code can be there to help,” says Larry Pon, a CPA in Redwood Shores, California, whose clients have been impacted by wildfires.

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We talked to tax and accounting experts about things to know, from a tax standpoint, if you are navigating the aftermath of a natural disaster such as a hurricane, tornado, wildfire or flood.

Receive more time to file a return

The IRS provides filing deadline extensions, technically called postponements, for affected taxpayers. The length of the grace period can vary but is usually several months. “Any individual or business with an address of record in the disaster area automatically qualifies,” says Eric Smith, IRS spokesman. “Most returns and payments are eligible for this relief, penalty-free and interest-free.”

Pon notes that there is no special paperwork to receive an extension; your zip code on your tax return is essentially proof. He suggested putting a note at the top of a paper return, or adding a note on an electronic filing, that you are taking advantage of a filing extension, but such a note is not required. If you receive a penalty notice from the IRS that you didn’t file in time, you can reply that you were in a designated disaster zone, Pon added.

It is important to check the IRS guidance for the new due date to file, notes Ed Kaminski, a CPA in Houston with clients impacted by hurricanes and floods. The IRS provides recent disaster relief information on its Disaster Assistance and Emergency Relief for Individuals and Businesses webpage. The IRS also has a disaster hotline: 866-562-5227.

You also can receive an extension to file if your tax preparer is in a designated disaster zone and unable to work on your return, noted Pon.

Other tax-related deadlines may be extended too. For example, if a disaster extends the April filing deadline for affected taxpayers, it also extends the cutoff for IRA contributions.

Pon advises checking the IRS notice to ensure you qualify for relief. “Don’t just make the assumption,” he says. The IRS publishes a web page that lists the areas affected by federal declared emergencies.

Claim losses not covered by insurance

Generally, you can deduct any losses beyond the reimbursement you receive from your insurance company. Losses are limited to the lesser of the cost or the fair market value of the item, said Kaminski. He gave the example of a piece of art bought for $1,000 but now worth $10,000; only the $1,000 cost can be claimed as a loss.

If you were responsible for a deductible when making a car or homeowners insurance claim, the deductible amount qualifies as a loss for your tax return because it was not covered by insurance.

If claiming a loss on your tax return, you must include the FEMA disaster declaration number on Form 4684, Casualties and Thefts, attached to the return. The number can be found on the IRS’s disaster relief news releases.

You have to be able to itemize your deductions in order to claim property or casualty losses. To itemize, you should have more than the standard deduction. The standard deduction for married couples filing jointly for tax year 2022 is $25,900; for single taxpayers and married individuals filing separately, the standard deduction is $12,950. For heads of households, the standard deduction is $19,400.

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You must subtract $100 from each casualty or theft event that occurred during the year after you’ve subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10 percent of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year.

Get relief for lost records

Calculating losses can seem impossible when records have been destroyed in a fire, flood or other disaster.

“I have clients who have literally lost everything. You see the before and after pictures, and the after picture looks like the moon. There’s nothing left,” says Pon.

If documents were destroyed, there are ways to reconstruct records, such as obtaining electronic copies of bank and credit card statements. The price you paid for your house is a public record. Most people remember which charities they donated to and can call the nonprofits to request documentation, notes Pon.

The IRS typically issues “safe harbor methods” for taxpayers to calculate losses after a disaster, according to Kaminski. Methods can include estimated repair cost, a licensed contractor’s estimate of the cost to restore the property, or the value from an appraisal. “The IRS is sympathetic about people losing all their records,” he says.

You also can obtain a free replacement copy of lost or damaged tax returns; the IRS waives the fee it normally charges.

But the bottom line is to keep good records and maintain copies you can access electronically or off-site from your home in case your residence is damaged or destroyed.

Amend a return to claim a loss in the prior year

Taxpayers who suffer uninsured or unreimbursed disaster-related losses can claim those losses on the tax return for the previous year, if they wish.

“This gives disaster victims additional flexibility,” says Smith, noting the loss may be more beneficial from a tax perspective in the previous year versus the current year. “Plus, if it’s helpful to you from, say, a cash-flow perspective, you have the opportunity of perhaps getting a refund sooner, rather than waiting to get the benefit when you file next year.”

Pon says it can be worth the time to assess which is the better year to file. “You want to run the numbers to see which is going to give you the bigger refund,” he says. “It depends which tax bracket you’re in, your tax situation. The same loss could have a different result in one year than the other.”

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To get a refund quickly, it may be better to claim the loss on next year’s original return, especially if the disaster happened late in the calendar year, instead of amending a return you filed by April 15. “Original returns are typically processed much more quickly than amended returns,” says Smith.

Know what’s taxable and what’s not

Qualified disaster relief payments are generally tax-free. However, you can’t double-dip when claiming losses. “Don’t get greedy,” says Pon.

For example, you can’t deduct casualty losses or medical expenses if they were specifically reimbursed by disaster relief grants. Also, if you deducted the loss of your home and later received a disaster relief grant for the loss of the same residence, you may have to include part or all of the grant in your taxable income.

“A variety of disaster payments are tax-free, but any that cover property damage need to be subtracted when figuring any disaster loss deduction,” said Smith.

If the Red Cross or Salvation Army provides temporary shelter, food or clothing, that aid is not taxable, Pon notes. However, disaster unemployment benefits, like regular unemployment benefits, are taxable.

Seek assistance to understand the rules

Filing a return with losses from a disaster can be more complicated than preparing a normal return. “You have to dig,” says Kaminski. “You need to do your research and ask for help.”

Hire a professional preparer to help you navigate complex rules. If you can’t afford to hire someone, your state society of CPAs may offer volunteer help, Pon notes.

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