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What You Need to Know About Tax Relief for Victims of Natural Disasters

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Nov 16th 2017
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Natural disasters such as winter ice storms, hurricanes, tornadoes, and wildfires have struck repeatedly in 2017, affecting millions of Americans. A spate of hurricanes in August and September have devastated coastal areas in Texas and Florida as well as U.S. territories in Puerto Rico and the Virgin Islands, pushing the IRS to spring into action with tax relief.

The tax code authorizes immediate relief for individuals — whose homes, household goods, and other properties suffer damage or are destroyed by such disasters — in the form of deductions and other tax breaks for casualty losses caused by events that the IRS describes as “sudden, unexpected, or unusual.”

Frequently, however, allowable write-offs turn out to be smaller than anticipated. Furthermore, individuals with high incomes and low losses will find they aren’t allowed any disaster-related deductions.  

What follows are answers to some often-asked questions about disasters.

Q: What are the long-standing limitations on claiming casualty losses?

A: The law permits relief only for uninsured losses. It requires you to reduce them by any settlements you receive, or expect to receive, from your homeowner’s or renter’s insurance.

There are other restrictions. First, you can’t claim any write-off for the first $100 of each casualty loss. Second, you have to itemize.

The major limitation is that generally you’re allowed to deduct total losses only to the extent they exceed 10 percent of adjusted gross income.

Q: In which year are you entitled to claim losses?

A: Usually, you’re able to claim them only for the year which they occur.  But an alternative becomes available when losses occur in disaster areas that are eligible for federal assistance.

Your choice is between a write-off for the loss on the return to be filed for 2017 or the one filed for 2016, whichever is more advantageous. Picking 2016 could mean a quicker refund now, when you need a cash infusion to help pay for property repairs or replacements.

Q: How does legislation enacted in September help victims of August’s back-to-back hurricanes Harvey and Irma?

A: Revised rules allow them to claim 100 percent of their losses, rather than the portion that exceeds 10 percent of AGI. And they don’t have to itemize. However, the $100 floor increases to $500. 

In the run-up to 2018’s mid-term elections, our lawmakers may decide to enact similar solace for, among others, victims of the devastating wildfires in Northern California.

Q: Are reportable losses reduced if help is received from others?

 A: Deductible losses are reduced by cash or property received from employers or from disaster relief agencies if the assistance is specifically for the purpose of restoring properties. Not so cash gifts that aren’t specifically designated for property restoration. This holds true even if the money is used to pay for the rehabilitation of property. Furthermore, any food, medical supplies, and other forms of subsistence they receive that isn’t for replacing property does not reduce deductible losses and does not count as taxable income.

Subsequent columns will discuss: relaxed rules for victims of natural disasters; losses in disaster areas that are eligible for federal assistance; and the requirement that such losses must be reduced by insurance settlements.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting). 

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