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Tax Relief in Disaster Situations

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... in a Disaster Area. Information About Presidentially Declared Disaster Areas ... Claim disaster-related casualty loss in the tax year of the casualty, or the ... – PowerPoint PPT presentation

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Title: Tax Relief in Disaster Situations


1
Tax Relief in Disaster Situations
2
Objectives
  • To Discuss
  • Federal Tax Relief Available to Taxpayers in a
    Disaster Area
  • Information About Presidentially Declared
    Disaster Areas
  • Calculating Reporting Disaster Area Losses

3
Possible Tax Relief for Disaster Situations
  • Special tax law provisions may help taxpayers
    recover financially from the impact of a
    disaster. The IRS may
  • Grant additional time to file, pay, and perform
    certain other acts during the extension period
  • Abate interest and late filing or late payment
    penalties
  • Establish waiver period for employment and
    excise tax

4
Tax Relief for Disaster Situations
  • Things to consider for a faster refund for
    individuals and businesses in a Presidentially
    Declared Disaster Area
  • Claim losses related to the disaster on the
    previous year tax return, usually by filing an
    amended return, or
  • Electronically file original tax return for the
    year the loss occurred

5
Filing Options for Presidentially Declared
Disaster Area Losses
  • Filing Options
  • Tax year of the casualty-
  • Claim disaster-related casualty loss in the tax
    year of the casualty, or the prior year, by
    amending the prior year tax return.
  • Claiming the loss on an original or amended
    return for prior year will entitle the taxpayer
    to an earlier refund, but waiting to claim the
    loss on the return for the year of loss could
    result in a greater tax saving, depending on
    other income factors.

6
Filing Requirements for Losses
  • Election to take casualty loss in preceding tax
    year must be made by the later of the following
    dates
  • Due date (without extensions) for filing tax
    return for the tax year in which the disaster
    occurred.
  • Due date (with extensions) for filing tax return
    for the preceding tax year.
  • Example A calendar year taxpayer ordinarily
    have until April 15, 2005, to amend 2003 tax
    return to claim a casualty loss that occurred
    during 2004.

7
Filing Requirements for Losses (contd)
  • How to deduct a loss in the preceding year
  • Include statement either on the original
    return or the amended return with the
    following information
  • - Date or dates of disaster
  • - City, Town, County and State of disaster
  • Statement can be either on the return or included
    with the return

8
Filing Requirements for Losses (contd)
  • Once election is made, it can be revoked within
    90 days of making the election.
  • Must return any refund or credit received from
    making the choice.
  • If revoked prior to getting refund, must return
    refund within 30 days of receiving it for
    revocation to be effective.

9
Presidentially Declared Disaster Areas
  • A list of the Presidentially Declared Disaster
    Areas, by State and County, are provided at the
    FEMA (Federal Emergency Management Agency)
    website at
  • www.fema.gov
  • IRS information about Presidentially Declared
    Disaster Areas can be found at
  • http//www.irs.gov/newsroom/index.html

10
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12
Casualty Determination
  • A casualty is the damage, destruction, or loss of
    property resulting from an identifiable event
    that is sudden, unexpected, or unusual.

13
Casualty Determination (contd)
  • A sudden event is one that is swift, not gradual
    or progressive.
  • An unexpected event is one that is ordinarily
    unanticipated and unintended.
  • An unusual event is one that is not a day-to-day
    occurrence and that is not typical of the
    activity in which you were engaged.

14
Disaster Area Loss
  • A "disaster area loss is a casualty loss that
    occurred in an area determined by the President
    of the United States to warrant Federal disaster
    assistance. These places are known as
    Presidentially Declared Disaster Areas.

15
Casualty Loss Proof
  • Information needed to support the loss
  • The type of casualty (car accident, fire, storm,
    etc.) and when it occurred
  • The loss was a direct result of the casualty
  • You were the owner of the property, or if a
    lessee, you were contractually liable for the
    damage

16
Casualty Loss Proof (contd)
  • Whether a claim for reimbursement exists for
    which there is a reasonable expectation of
    recovery.
  • Documented evidence to support the claimed
    allowable loss.

17
To Prove a Loss
  • Records may have to be reconstructed.
  • The information gathered will be used for tax
    purposes, as well as insurance reimbursement.

18
Prior Year Tax Returns
  • If necessary, file Form 4506 to secure copies of
    the previous four years of income tax returns.
  • The fee is waived if your loss is in a
    Presidentially Declared Disaster Area.
  • Write in the applicable disaster title
    information in red at the top of F4506 to
    expedite processing and waiver the fees.

19
Real Estate
  • Take photographs as quickly as possible to
    establish the extent of damage.
  • Contact the title company, or bank that handled
    the purchase, for copies of escrow papers.

20
Real Estate (contd)
  • Use your current property tax statement for land
    vs. building ratios. If not available, contact
    the county assessors office.
  • Check with a local appraiser or real estate
    companies for a list of comparable sales to
    determine the fair market value within the same
    neighborhood.
  • Contact contractors used for records that would
    assist you.

21
Real Estate (contd)
  • For inherited property, check court records for
    probate values.
  • Check with county assessors office for old
    records about the property.
  • Copy of the deed for the property

22
Real Estate (contd)
  • If the home was custom built, contact the
    contractor to see if records are available.
  • Most insurance policies list a value of the
    building to establish a base figure for
    replacement value insurance.
  • Get written accounts from friends and relatives
    who saw the house before and after any
    improvements.

23
Personal Property
  • Make a diagram or floor plan of the property and
    include where furniture was placed. Also include
    any bookcases, where pictures were located and
    shelves including personal items.
  • Reconstruct from the original cost invoices or
    old sales catalogs. Fair Market Value can be
    determined through local thrift stores, local
    news papers and the library.
  • Try to locate photographs of electronics,
    computers, appliances, clothing, jewelry, etc

24
Vehicles
  • Valuation services are available on internet.
  • Contact selling dealer or lender for a copy of
    the contract. Provide facts about the vehicle
    for a comparable price figure.
  • Use newspaper ads for the period in which the
    vehicle was purchased to determine the cost.
  • For reconstruction of vehicle mileage contact
    your dealer or repair location for repair records.

25
Business Records
  • Inventories get copies of invoices from
    suppliers (invoices should date back at least one
    year).
  • Obtain copies of last years business returns.
  • Furniture Fixtures prepare a diagram or floor
    plan of the business location including
    furnishings, equipment, and inventory locations.

26
Business Records (contd)
  • If you purchased an existing business, contact
    the broker for a copy of the purchase agreement.
    This should detail out what was acquired.
  • If the building was constructed, contact the
    contractor for building plans, or the city/county
    planning commissions for copies of plans.

27
Disaster Loss Publications
  • IRS Disaster Losses Kits contain publications,
    forms, and worksheets that are helpful in
    reporting casualty losses
  • Publication 2194 - For Individuals
  • Publication 2194B - For Businesses

28
Losses
  • To calculate loss
  • Determine
  • adjusted basis before disaster
  • decrease in fair market value (FMV) as a result
    of disaster
  • Subtract any insurance or other reimbursement
    received from the smaller of (a) or (b) above

29
Losses (contd)
  • Casualty losses of personal-use property and
    employee property is limited to
  • 100 deductible per event
  • 10 AGI limit per annum
  • 2 AGI limit if used for business by employee

30
Losses (contd)
  • Presidentially Declared Disaster Areas
  • No gain is recognized on any insurance proceeds
    received for unscheduled personal property that
    was part of the contents of a main home.

31
Losses (contd)
  • Presidentially Declared Disaster Areas
  • Insurance proceeds received for the home and any
    scheduled property is treated as received for a
    single item of property.
  • Any property similar or related in service or use
    to the home so converted (or its contents) shall
    be treated as property similar or related in use
    to that single item of property.

32
Losses (contd)
  • Presidentially Declared Disaster Areas
  • Disaster relief payments or assistance do not
    reduce casualty loss unless they replace lost or
    destroyed property.
  • Disaster unemployment payments are unemployment
    and are taxable.
  • Disaster relief grants are generally not included
    in income. However, do not include as casualty
    losses any amounts covered by the grant payments.

33
Losses (contd)
  • Casualty Losses - Adjustments to Basis
  • Decrease basis in property by
  • any insurance/other reimbursement,
  • any deductible loss
  • Increase basis in property by
  • Amount you spend on repairs that prolong life
    of property, increase value, or adapt it to
    different use.

34
Other
  • When to include insurance payments for living
    expenses in income
  • Normally living expense payments from insurance
    in excess of the temporary increase in living
    expenses are taxable income included on line 21
    of Form 1040.
  • In the case of a Presidentially declared
    disaster, any payment to an individual to
    reimburse or pay reasonable and necessary
    personal, family, living, or funeral expenses is
    not taxable if it is not otherwise compensated
    for by insurance or otherwise.

35
FEMA Mitigation Programs
  • FEMA Mitigation Payments, includable in income
  • Flood Mitigation Assistance Program (FMA)
  • Pre-Disaster Mitigation Program (PDM)
  • Hazard Mitigation Grant Program (HMGP)
  • No Reduction to Valid Casualty Loss
  • Watch For Potential Law Change

36
Gains on Casualty
  • If you receive an insurance payment or other
    reimbursement in excess of the adjusted basis of
    damaged or destroyed property you will have a
    gain.
  • Amount received
  • (Adjusted basis)
  • Gain

37
Gains on Casualty (contd)
  • If your main home is destroyed and the insurance
    proceeds result in a gain
  • You can treat this as a sale of residence subject
    to the same rules.
  • A reduced maximum gain exclusion will apply if,
    as of the date the home was destroyed, the
    taxpayer
  • Had not owned the home for 2 years
  • Had not occupied the home as a principal
    residence for 2 years or
  • Had within 2 years previously sold or exchanged
    another principal residence.

38
Gains on Casualty (contd)
  • If a casualty to your main home is in a
    Presidentially Declared Disaster Area
  • you can postpone any recognized gain on your
    main home if you buy a new home within 4 years
    after the end of the first tax year in which any
    gain is realized,
  • or
  • you can recognize the gain and report it.

39
Gains on Casualty (contd)
  • You do not have to recognize gain on
    destroyed/damaged business property if it is
    replaced within two years of the end of the tax
    year in which gain is realized.
  • Example If you received payment in 2004
    resulting in a gain, you must replace property by
    12/31/2006 to defer gain.

40
Gains on Casualty (contd)
  • Generally, you cannot postpone gain if you buy
    replacement property from a related party.
  • Applies to
  • C Corps
  • Partnerships in which more than 50 of the
    capital or profits is owned by a C Corp
  • All others if the total realized gain for the
    year is over 100,000.

41
Gains on Casualty (contd)
  • To defer gain
  • You must buy property specifically to replace the
    damaged or destroyed property in order to defer
    gain.

42
Gains on Casualty (contd)
  • Basis of replacement property
  • Cost of replacement property
  • (Postponed casualty gain)
  • Adjusted basis of replacement property

43
Reporting Casualty Gains/Losses
  • Personal-use property
  • Losses go on Form 4684 and carry to Schedule A
    Itemized Deductions
  • Gains go on Form 4684 and carry to Schedule D
    Capital Gains/Losses

44
Reporting Casualty Gains/Losses (contd)
  • Business and income producing property
  • Gains/Losses are reported on Form 4684 and carry
    to various forms.
  • Business use of home carries to Form 8829
  • Other business property carries to Form 4797

45
Reporting Casualty Gains/Losses (contd)
  • Rental properties
  • Report on Form 4684 and then on Form 4797
  • Have 2 years from close of tax year when you
    realize the gain to replace property and defer
    gain
  • Casualty/theft losses are generally not limited
    by Form 8582 (passive losses)

46
Reporting Casualty Gains/Losses (contd)
  • Insurance reimbursement after deducting loss
  • If less than expected (and accounted for on
    casualty loss) include difference as loss on
    return for year when you can reasonably say
    youre not getting any more money.

47
Reporting Casualty Gains/Losses (contd)
  • Insurance reimbursement after filing
  • If greater than expected (and accounted for on
    casualty loss) include difference as income in
    the year received.

48
Net Operating Losses
  • Individual or Business casualty losses can
    generate Net Operating Losses (NOLs)
  • NOLs generated by casualty losses can be carried
    back or forward the same as any other NOL.

49
Reminders
  • Filing Options for Presidentially Declared
    Disaster Area Losses
  • Taxpayers have the option to claim the
    disaster-related casualty loss on either the
    current year tax return (the year of the
    casualty) or in the prior year by amending the
    prior year tax return.

50
Reminders (contd)
  • Filing Options for Presidentially Declared
    Disaster Area Losses
  • Claiming the loss on an original or amended
    return for the prior year will get the taxpayer
    an earlier refund, but waiting to claim the loss
    on the return for the year of loss could result
    in a greater tax saving, depending on other
    income factors.

51
Additional Sources of Information
  • IRS Publication 547 - Casualties, Disasters and
    Thefts
  • Publication 2194 Disaster Loss Kit For
    Individuals
  • Publication 2194B Disaster Loss Kit For
    Businesses
  • www.irs.gov
  • Local IRS Taxpayer Assistance Center

52
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