Disaster Relief

TAXPAYER CASUALTY GUIDE

When Disaster Strikes, Jackson Hewitt Is There for You 

When a disaster strikes, the financial and emotional effects can be devastating for several years to come.  Let Jackson Hewitt help you.  If you suffer a loss, Jackson Hewitt can guide  you through the steps you need to take to ensure you obtain the most from the tax benefits available to you.

Before a Disaster 

Valuable information about preparing for disasters is available on the American Red Cross (www.redcross.org) and the Federal Emergency Management Agency (www.fema.gov) Web sites.  There are certain steps you can take before a disaster strikes that will assist you when filing your income tax return.  These steps are as follows:

1.  Determine whether you have appropriate insurance.  Homeowner's insurance and auto insurance should be reevaluated periodically.  Use your home inventory list to verify that your policy's coverage matches the value of your possessions.  For particular items of value in your home you may want to obtain a professional appraiser's report.  The cost of the appraisal may be deductible as a miscellaneous itemized deduction subject to 2% of the adjusted gross income (AGI) on your return.

2.  Know your basis.  Ultimately, you have the burden of proving to the IRS the amount you claim as a loss on  your return. Be prepared to provide the IRS with documentation to support your basis.  This will be important in determining how much of your loss you are allowed to deduct on your return.  Keep any documents that can help you establish the original purchase price of your property, such as your HUD-1 Settlement Statement or a Bill of Sale.  If you make any permanent improvements to your home (for example, installing storm shutters or building a levee to prevent flooding), add the costs to the original cost of your home.  Keep your receipts or other documentation whenever practical.  The allowable loss on your tax return is limited to your basis in the property, even if the loss and the fair market value (FMV) of the property are greater than your basis.

3.  Identify your property.  Take pictures or videos of your home and of its contents, especially valuable items, for identification purposes.  Keep an itemized list of your property whenever administratively reasonable and possible.  You can use the checklist found in IRS Publication 584, Casualty, Disaster, and Theft Loss Workbook; one you have created yourself; or the Household Inventory List Jackson Hewitt has created.  Keep purchase receipts, cancelled checks, credit card statements, or other proof of the original cost of the property.  You must also prove that you own the property or are responsible to the owner for any damage to the property.

4.  Keep important documentation in a safe place.   You should make copies of all your legal and financial documents.  The originals should be kept in a safe deposit box or other institution that provides safe deposit boxes.  If you home is destroyed, any documents kept there will probably also be destroyed.  If you are evacuated, take a copy with you in a water-proof bag or container, or you can place a copy in a fire-proof safe.  Another copy of the documents and the extra key to your safety deposit box should be provided to an out-of-state relative or friend.  Do not forget to make back-up copies of important information you keep on your computer's hard drive.  These backups can be copied to a disk, a CD, or a removable drive.  You may want to keep certain information handy, such as contact names, accounts, addresses, and phone numbers, on an Internet-based storage system, such as your Internet e-mail account.  This way, you can access important information quickly and conveniently from any computer wherever you are located.  For detailed information on what you need to do to replace your lost documents, refer to the Jackson Hewitt, How to Replace Lost Identification and Documents Guide.

After a Disaster 

The following are certain steps you should take after suffering a casualty loss:

1.  Document your loss.  Take photographs or videos of the damage to your property, as well as any repairs to your property.  Keep receipts for any repair or clean-up work.  Although they are not considered deductible losses, the repair or clean-up expenses may help establish a decline in the FMV of your property, as long as the expenses are incurred to restore your property to its original condition.  Your allowable loss on your tax return is limited to the smaller of your basis in your property or the decrease in the fair market value.  Obtain quotes from several reputable contractors for the necessary replacements or repairs.  These quotes can be used to substantiate the loss in FMV.

To determine the decline in the FMV, you also have to prove the FMV of your property before the disaster.  If obtaining a professional appraisal before the casualty is not feasible or cost-effective, you can use comparable classified ads, thrift store values, or published industry standard market values (such as the "blue book" values for automobiles) to determine the pre-disaster FMV.

Save any police reports or newspaper articles to document the disaster that affected you if it is not a disaster that is well-known, such as a federal declared disaster.  You may be able to use the inventory list the Federal Emergency Management Agency (FEMA) provides you for loss as support when claiming your loss on Form 4684, Casualties and Thefts. 

2.  File a timely insurance claim.  If your property is covered by insurance, you should file a timely insurance claim for reimbursement of the loss.  If you do not file an insurance claim, the IRS may limit your eligible casualty or theft loss to the amount that is normally not covered by your insurance, such as your insurance deductible amount.

 3.  Spend your insurance reimbursement money wisely.  You have two years to replace any damaged, destroyed, or lost property.  If you meet this time requirement, your insurance reimbursement will not be taxable, even if it exceeds your basis in your property.  However, if you do not purchase property that is similar or related in service or use to the property you are replacing, part of your reimbursement may be taxable.  If the property you are replacing is your home, you may be able to exclude up to $250,000 (or $500,000 if married filing jointly) for your taxable gain.  In some situations, the deadline to replace property may be extended by the IRS.  Be aware of the guidelines that apply to you situation and plan accordingly.

4.  Keep track of the payments you receive.  Payments you receive may be excluded or included in income depending on whether restrictions were attached to how you spend the money, or if you received the payments as part of relief provided to individuals in a federally declared disaster.  These payments also affect the calculation of allowable casualty loss.  Keep all types of FEMA reimbursement documentation or checklists and any Small Business Administration appraisals, if applicable.

Do not reduce your casualty loss by insurance payments you receive to cover living expenses that are a direct result of either losing the use of your main home because of a casualty or because government authorities do not allow you access to your main home after a casualty or threat of one.  However, if these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income.

Food, medical supplies, and other forms of relief assistance you receive are not included in your income and do not reduce your casualty loss, unless the assistance replaces your lost or destroyed property.

Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster are not taxable income.  Disaster unemployment assistance payments are unemployment benefits that are taxable. 

Generally, disaster relief grants you received under the Robert T. Stafford Disaster Relief and Emergency Assistance Act are not included in your income.  These include: payments you receive for reasonable and necessary expenses incurred for personal, family, living, or funeral costs; the repair or rehabilitation of a personal residence (rented or owned); and the repair or replacement of the contents of a personal residence.

Federally Declared Disaster 

If the president of the United States has determined your area is part of a federally declared disaster, you must choose how you will claim the loss:

  • You may elect to claim the loss as part of your itemized deductions for the year in which it occurred. 
  • You may elect to amend your prior-year tax return by filing Form 1040X, Amended US. Individual Income Tax Return, and claim the loss as part of your itemized deductions in the previous tax year.  Specify the date or dates of the disaster and the city, town, county, and state where your property was damaged or destroyed on your amended return.  The option to claim the loss on the prior year's amended return expires on the due date (without extensions) of the tax return for the year of the disaster. 

By amending your return, you can get your refund for the loss sooner than waiting until the following year.  However, you should compare your tax situation and AGI for both years to determine whether it is to your tax advantage to claim the loss in one year rather than another.  If you are considering amending a prior-year return and you used the standard deduction in that year, gather your records for prior-year expenses, such as your state tax withholding, real property taxes, personal property, home mortgage interest, and charitable contributions paid during the year.  Add these expenses to the amount of your deductible casualty loss to determine whether you have enough expenses to claim itemized deductions instead of the standard deduction for the prior year.

There are other benefits you are entitled to if the president determines you are located in a disaster area.  Instead of the usual two years, the law provides for a four-year replacement period for replacing principal residences damaged due to a federally declared disaster.  Also, the IRS may postpone certain tax deadlines of taxpayers who are affected by a federally declared disaster.  The tax deadlines the IRS may postpone include those for filing income, estate, gift, generation-skipping transfers, and certain business taxes; paying taxes associated with those returns; and making contributions to a traditional IRA or Roth IRA.  If the IRS postpones the due date for filing your return and for paying your tax, they may abate the interest on underpaid tax that would otherwise accrue for the period of postponement.

Special Considerations for Self-Employed Individuals 

The casualty loss deduction for business or income-producing property is not subject to the $100 rule and the 10% of AGI rule.  Special tax rules may apply. 

Contact a Jackson Hewitt tax professional for assistance in these complex tax situations.

Jackson Hewitt® wants to help you to get all the deductions and credits you deserve.