By Deanna C. White
This fall, Hurricane Sandy devastated significant portions of the East Coast, causing unprecedented damage to homes and businesses. Now, five weeks later, as people continue to assess their losses and undertake the daunting task of rebuilding, Jackson Hewitt Tax Service highlights some key considerations for tax service providers who want to help eligible taxpayers in their area take advantage of disaster-related tax considerations.
"As tax preparers, one of the key issues in getting our clients back on their feet after a disaster is making sure they start the process of documentation. Helping them understand and document what losses they can file on their insurance claims and how to claim the loss on their tax return are critical to their financial recovery," said Mark A. Steber, chief tax officer, Jackson Hewitt.
Steber outlines the following advice for tax service providers hoping to help their clients who have suffered any kind of casualty loss.
1. Help your clients begin the documentation necessary to get their lives in order, and help them with their insurance claims and their casualty loss deductions. Steber recommends disaster victims:
- Begin a running list of items lost as soon as possible.
- Add lost items (no matter how large or small) to the list every time they think of a new item.
- Look at family photos and ask family members to send old photos to assist in recall and then document what was lost.
- Find source documents for any items that might have historical value.
- Look to the IRS website or the Jackson Hewitt website for a list of documents that may need to be replaced to determine what may have been lost.
Resources for CPAs
For CPAs and other tax service providers looking to further educate themselves on the topic of casualty loss, Steber recommends two sources:
- The IRS website, which offers publications and workbooks for both service providers and taxpayers on how to substantiate deductions as a result of casualties, disasters, and theft
- Jackson Hewitt's online Disaster Recovery Task Guide.
Steber also recommends advising clients to take photographs or videos of the damage to their property as well as any repairs made to their property. Advise clients to keep receipts for any repair or cleanup work; however, make sure they know that costs for repairs or cleanup cannot be deducted on a tax return. Instead these expenses are helpful when clients are determining any decline to the fair market value of the property, as long as the expenses are incurred to restore their property to its original condition.
2. Help your client keep an eye on the intricacies of the tax elements involved in casualty loss. "The rules governing casualty losses are confusing and vary based on the disaster classification for the area," Steber said. In addition, the ability to deduct a tax loss is very complicated because clients have to consider issues like proper documentation, fair market value, and historical value of items lost.
3. In the case of Hurricane Sandy, tax service providers also have to be prepared to counsel clients as to whether to claim their losses on their 2012 tax return or amend their 2011 tax returns to claim their losses.
"Several areas have been designated as federally declared disasters, which allows taxpayers to claim their losses on their 2012 tax returns when they file in the coming months or to amend their 2011 tax returns to file the claim," explained Steber. "By amending returns, clients can get their refund for the loss sooner, but be sure to compare their tax situation and adjusted gross income for both years to determine whether it is to their tax advantage to claim the loss in one year rather than another."
4. Advise your clients to file a timely insurance claim for reimbursement of their loss as soon as possible. If a client's property is covered by insurance, the client should file a timely insurance claim for reimbursement of the loss. The IRS generally limits the allowed loss to the amount of loss after any insurance reimbursement the client got or should have gotten, so clients should file their insurance claims early.
5. Be aware of other areas of financial support your clients may be able to pursue through the disaster declaration: i.e., FEMA loans, Small Business Administration loans, and Disaster Unemployment Assistance. Steber said tax service providers should "at least be conversant" as to what disaster relief resources are available to their clients and where clients can access those resources. "Tax service providers would be well serviced to bone up, not just on tax laws involved with disasters, but understanding FEMA rules and what types of disaster loans, or low income loans, are available to their clients," Steber said.
6. Do not promote yourself as a disaster or casualty loss specialist unless you truly have experience in handling disaster or casualty loss claims. "The tax code is very complicated in these areas, and tax service providers really need to fully understand that code before they put themselves out there," Steber said.
Ultimately, the greatest advice any tax service provider can give in the event of a casualty, Steber said, is to seek advice from a professional tax preparer experienced in disaster and casualty loss.
"Disasters and casualty losses are not an area where people want to try to use package software or try to do their taxes themselves. This is an area where they definitely need to seek out trained and experienced professional help, particularly when they make their first choice . . . whether they will claim their losses this year or amend last year's taxes," Steber said. "The tax code is complicated. There are lots of additional considerations, nuances, and complicated loopholes in events like these. I tell everyone who has gone through an event like this to hire an advisor who is experienced in disaster, casualty, and theft. The benefits will more than offset the cost."