Tax strategy: Secure fast tax relief for disaster losses

If a client has been victimized by the vicious tornadoes or floods throughout the country this year, or has suffered personal casualty losses due to some other natural disaster, he or she may not have to wait to file a 2011 tax return to recoup some tax benefits.
 
Strategy: File an amended 2010 return for the client.
 
Reason: The tax law allows an individual to claim a casualty loss in a federally declared disaster area on the tax return for the prior year (the year before the disaster actually occurred). So your client can get a tax refund faster. Similarly, the client can claim the casualty loss on his or her 2010 tax return filed by Oct. 17, 2011, if he or she got an extension for last year’s return.
 
Background information: An individual is entitled to deduct a casualty loss for damage caused by an event that is “sudden, unexpected or unusual.” This includes natural disasters like tornadoes, hurricanes, fires, and floods. After subtracting insurance proceeds relating to the event, two limits are applied to personal property losses:
 
1. The deductible amount is reduced by $100 for each casualty or theft event.
2. The remainder is deductible only to the extent it exceeds 10% of the client’s adjusted gross income (AGI).
 
Example: Frieda Marquez’s home is severely damaged by a flood. An independent appraiser estimates the damage at $80,000, and the insurance reimbursement Frieda receives is $50,000. For simplicity, let’s say her AGI for 2011 is $100,000. Based on these facts, the loss amount of $30,000 ($80,000 minus $50,000 insurance reimbursement) is reduced by $100 to $29,900. Because 10% of Frieda’s AGI is $10,000, her deduction is further reduced to $19,900 ($29,900 minus $10,000).
 
Normally, a taxpayer is required to deduct the loss in the year the casualty event occurs. However, if the loss occurs in a federal disaster area (see box), he or she can elect to deduct that loss on the tax return for the year immediately before the tax year in which the disaster happened. If this special tax election is made, the taxpayer must include a statement with the return specifying:
 
  • That he or she is choosing to take the deduction in a prior year
  • The date the disaster occurred
  • The city or town, county and state where the damaged property is located.
 
Not only will a client obtain the money faster than if he or she had waited to file the 2011 return, the tax loss may be more valuable to the client in 2010 than it would be in 2011, depending on his or her personal circumstances.
 
Advisory: A taxpayer has 90 days to undo the election. If the election is revoked before the client receives a refund, he or she then has 30 days to return it.
 
Online Resources
 
 
FEMA disaster list for 2011
Here’s a list of the major disaster declarations this year by the Federal Emergency Management Agency (FEMA) as of May 24.
Date State Incident Description
5/20 ID Flooding, Landslides and Mudslides
5/20 ND Severe Winter Storm
5/13 OK Severe Winter Storm and Snowstorm
5/13 SD Flooding
5/11 MS Flooding
5/10 MN Severe Storms and Flooding
5/10 ND Flooding
5/09 MO Severe Storms, Tornadoes, And Flooding
5/09 TN Severe Storms, Tornadoes, Straight-line Winds, and Flooding
5/09 TN Severe Storms, Flooding, Tornadoes, And Straight-Line Winds
5/05 IA Severe Storms, Tornadoes, and Straight-line Winds
5/04 KY Severe Storms, Tornadoes, And Flooding
5/02 AR Severe Storms, Tornadoes, And Associated Flooding
5/01 TN Severe Storms, Tornadoes, Straight-line Winds, and Associated Flooding
4/29 GA Severe Storms, Tornadoes, Straight-line Winds, and Associated Flooding
4/29 MS Severe Storms, Tornadoes, Straight-line Winds, and Associated Flooding
4/28 AL Severe Storms, Tornadoes, Straight-line Winds, and Flooding
4/22 OK Severe Storms, Tornadoes, And Straight-Line Winds
4/19 NC Severe Storms, Tornadoes, And Flooding
4/18 CA Tsunami Waves
4/08 HI Tsunami Waves
4/05 WI Severe Winter Storm and Snowstorm
3/31 TN Severe Storms, Tornadoes, and Flooding
3/25 OR Tsunami Wave Surge
3/25 WA Severe Winter Storm, Flooding, Landslides, and Mudslides
3/24 NM Severe Winter Storm and Extreme Cold Temperatures
3/23 MO Severe Winter Storm and Snowstorm
3/17 IL Severe Winter Storm and Snowstorm
3/07 MA Severe Winter Storm and Snowstorm
3/03 CT Snowstorm
2/18 NY Severe Winter Storm and Snowstorm
2/17 OR Severe Winter Storm, Flooding, Mudslides, Landslides, and Debris Flows
2/11 UT Severe Winter Storms and Flooding
2/04 NJ Severe Winter Storm and Snowstorm
2/01 ME Severe Storms And Flooding
1/26 CA Winter Storms, Flooding, and Debris and Mud Flows

Reprinted with permission from The Tax Strategist, October 2008. For continuing advice on this and numerous other tax strategies, go to www.TaxStrategist.net.

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