Income Tax Preparation and IRS Representation
Serving The Woodlands, TX and Greater Houston
HURRICANE IKE
DEDUCTING HURRICANE IKE LOSSES--EVEN IF YOU DON'T ITEMIZE
New tax laws have greatly liberalized the rules for deducting casualty losses related to Federally Declared Disasters, such as Hurricane Ike, that had occurred in 2008 or will occur in 2009. Changes in disaster tax relief include who can deduct such losses and how the amount of the loss deduction is calculated.
Please note that this page only addresses loss or damage to personal use property, not property use in trade, business, rental, production of income or employee-owned property.
CHANGES IN WHO CAN DEDUCT LOSSES
Normally, only taxpayers who itemize their deductions can get disaster tax relief by claiming casualty losses. However, the new law now allows non-itemizers (those who claim the standard deduction) to increase the amount of their standard deduction by their deductible loss (see below for how to calculate this amount).
Please note that this change only applies to losses from Federally Declared Disasters. Other losses, such as fires, follow the normal rules (itemizers only, 10% AGI limitation, etc.)
[NOTE: Non-itemizers who paid property taxes on their homes in 2008 may also wish to check our Tax News page regarding increasing their standard deduction by up to $1,000.]
CHANGES IN HOW LOSS DEDUCTION IS CALCULATED
The amount of any casualty loss is defined as the Fair Market Value (FMV) of the property immediately before the casualty minus the lesser of FMV of the property immediately after the casualty or the tax basis (cost + improvements - prior tax depreciation if any).
Normally, any loss after insurance or other reimbursement is reduced by $100 before applying the income threshold test. This is intended to weed out very small losses. (The new law raises the per-casualty floor from $100 to $500 for 2009 only.) We believe it is intended to weed out the relatively small losses so the IRS doesn't get swamped with them.
The great news for Hurricane Ike victims seeking tax relief is that the Adjusted Gross Income (AGI) limitation has been waived. Normally, only the portion of the tentative deductible loss that exceeds 10% of your AGI can be claimed. In other words, normally you are on your own for losses less than 10% of your income. But the new law waives this limitation for Hurricane Ike victims, so any net losses over the $100 per-casualty floor for 2008 are deductible (even if you take the standard deduction).
ITEMS THAT DO NOT COUNT AS CASUALTY LOSSES
- Cost of protecting property against casualty. Examples: cost of insurance, boarding up windows, purchase of generator prior to storm, etc.
- Incidental related expenses. Temporary housing, rental car, purchase of generator and gasoline due to power outage, medical treatment (may be deductible as medical expense subject to 7.5% of AGI test).
- Replacement cost. Bought a couch for $1,000 ten years ago. Value had declined to $100 just before the disaster struck, destroying the couch. Maximum loss limited to $100 (value just before disaster).
- Sentimental value. Can only deduct fair market value of item on open market. Value of grandma’s photo is probably no more than cost of used picture frame.
- Decline in market value of property in or near area. Can only claim losses for actual physical damage. If your property not damaged, decline in value due to nearby damage is not a casualty loss.
- Cost of documenting losses. Cost of photographs, appraisals, etc. to document your losses are not considered part of the loss. They may however be deducted as a miscellaneous itemized deduction subject to the usual 2% of AGI floor.
- You cannot deduct "lost wages" as this will already be reflected in your lower W-2 or 1099-MISC.
INSURANCE CLAIMS, REIMBURSEMENTS, GRANTS, AND OTHER REIMBURSEMENTS
Generally, any type of reimbursement for loss (such as insurance proceeds and FEMA grants) reduces the amount of your casualty loss. These payments are not considered as income.
Most types of disaster relief payments are not considered to be income to the extent that any expenses they are intended to cover (such as food, temporary lodging, and clothing) are not otherwise reimbursed by insurance or other reimbursement.WHEN TO DEDUCT YOUR LOSSES: 2007 OR 2008 RETURN?
Generally, casualty losses are only deductible in the year the casualty occurs (2008 tax return in the case of Hurricane Ike). However, for casualty losses incurred in a Federally Declared Disaster Area, taxpayers have the option of taking the loss on the preceding year's tax return by amending that return.
Most newspapers and other media outlets publicizing this fact stress that this allows taxpayers to reduce their 2007 tax liability and get a refund earlier, usually within 60 days, rather than waiting to claim it on their 2008 return and getting a bigger refund for that tax year. Now that we are in the 2008 tax year filing season, for most taxpayers it would be quicker to just claim their losses on their 2008 return and e-file it.
However, for a few taxpayers there may still be an advantage to amending their 2007 return rather than claiming the casualty loss on the 2008 return. Due to the progressive nature of tax rates, if a taxpayer's taxable income was significantly higher in 2007 than in 2008, the same deductible loss could be worth more (i.e. save more on taxes) in 2007 than in 2008. Ask your tax professional to review your individual situation.
We have heard from a Louisiana CPA however that after Hurricane Katrina taxpayers who opted to deduct their disaster losses by amending their prior years' returns had been audited with increased frequency. Of course if you have proof of your losses this should not be a problem.
If you wish to use this strategy, you must do so before April 15, 2009, the due date of casualty year return without extension, otherwise you will have to claim the loss on your 2008 return.
READY FOR A SHOCKER? YOU MAY HAVE A TAXABLE CASUALTY GAIN!
Believe it or not, some Hurricane Ike victims may actually have a taxable casualty gain! How can that happen? The first step in determining the amount of your casualty loss is to see if you actually have a casualty gain. If the amount of your insurance or other reimbursement is more than your tax basis (cost + improvements - prior tax depreciation if any), you have a gain. So, if you received a $300,000 insurance settlement on your property that was destroyed, but you only paid $100,000 for it some years ago, you may have a gain for tax purposes. Think of it this way, if you had bought it for $100,000 and sold it to someone else for the same $300,000 as you got from the insurance company, you would have had a gain.
Whether this gain is currently taxable, deferred, or excluded (not taxable) depends on the prior use of the property. The tax treatment will vary depending on whether it was a primary residence, a second or vacation home, rental property, used in trade or business, or was an investment property and how and when insurance proceeds are re-invested. For primary residences, the Section 121 residence gain exclusion may apply. A reduced gain exclusion may apply even if you do not meet the time tests since casualties from disasters and involuntary conversions (including condemnation) are included in "safe harbor" provisions. If you have a gain, you may wish to consult with a licensed tax practitioner.
OTHER THINGS TO KEEP IN MIND
Please note that casualty loss refers to physical damage only, costs associated with evacuation or protective measures such as boarding up windows are not deductible by individuals. Generally, if in subsequent years a taxpayer receives a reimbursement of casualty losses claimed on an earlier original return, no amended return if filed, but the reimbursement is instead claimed as income in the year received. Reimbursements for losses claimed in regard to Hurricanes Katrina, Rita and Wilma in 2005 are an exception to this rule.
For those who do itemize their deductions, casualty losses are not part of the "haircut" or itemized deduction limitation based on what the IRS considers high income ($159,950 or half that for married filing separately). You get the full deduction for casualty losses.
The information presented on this page is of a general nature, you should not take any action based on this material without first consulting your tax professional regarding your particular circumstances as each taxpayer's situation is unique. Please see our Legal Notices page for general website disclaimers.
TAXPAYERS SHOULD DOCUMENT THEIR LOSSES IN A MANNER SIMILAR TO AN INSURANCE CLAIM. KEEP ANY RELATED PHOTOS, SALES RECEIPTS, REPAIR RECEIPTS, TEMPORARY REPAIR COST RECEIPTS, ETC. KEEP COPIES OF ANY PAPERWORK SENT TO OR RECEIVED FROM INSURANCE COMPANIES.
SO WHY IS IT SO HARD TO FIND THIS INFORMATION ON THE INTERNET?
Many people are having difficulty finding this information on the official IRS website (www.IRS.gov) when typing "Hurricane Ike" or similar wording into the "search" box. I suggest looking at Publications 547, 584, 584-B, 3932, 2194, 2194-B and 4512-C.
It is difficult to find information regarding tax breaks afforded Hurricane Ike victims by simply searching on "Hurricane Ike" without specifying "federally declared disaster".
The lack of publicity concerning the special treatment of Hurrricane Ike casualty losses is probably due to the fact that it is buried in the "Emergency Economic Stabilization Act of 2008" which became law in early October 2008. This is the infamous $700 billion bailout bill.
- Division C - Tax Extenders and Alternative Minimum Tax Relief
- Title VII - Disaster Relief
- Subtitle B - National Disaster Relief
- Section 706 -
EXAMPLE HURRICANE IKE CASUALTY LOSS DEDUCTION CALCULATION
For this illustration assume the following:
- Purchase price of home: $170,000.
- Cost of pool added to home after purchase: $30,000.
- Fair Market Value of home immediately before Hurricane: $285,000.
- Fair Market Value of property after Hurricane: $40,000 (value of land and foundation).
- Insurance proceeds: $130,000.
- Your 2008 Adjusted Gross Income: $75,000.
Calculation:
FMV before Loss $285,000
-FMV after Loss - 40,000
Actual Loss $245,000
-Basis (cost) -200,000 ($170k cost + $30k pool)
Lower of Loss
or Tax Basis $200,000 (cannot count appreciation)
-Insurance -130,000 (check your policy today!)
Net Loss $ 70,000
Per Incident floor - 100
Tenative Loss $ 69,900
10% AGI Limitation - 0 Normally 10% of AGI ($7,500 in
this example), waived for
Hurricane Ike victims.
Deductible Loss $ 69,900
WORKING ON YOUR 2008 TAX RETURN?
We have published this page as a public service.
While we welcome questions from our paying clients, we cannot answer inquiries regarding this topic from the general public as that would take away from our time serving our valued clients. We suggest that you contact your own tax preparer with any questions regarding this topic (assuming it is not a software box, as it would look really odd to be talking to a box). If your current tax preparer can't or won't answer your Hurricane Ike Casualty Loss questions you should strongly consider switching to a professional tax advisor.
If you aren't getting the service you deserve from your current tax preparer or have decided that you need the services of a licensed tax practitioner, please contact us to arrange an appointment for our professional services at a reasonable cost.
As you can see, preparing your 2008 tax return may be a bit more challenging than you're used to. Why not take advantage of our professional services and have your return prepared by a licensed tax practitioner? Our rates our reasonable and you'll sleep better.
Still planning to do your own return? You may want to check out our Rebates & Stimulus Payments and Tax News pages before starting. Good luck with that!
FEDERALLY DECLARED DISASTER AREA
The entire Houston-Galveston area is included in the disaster area.
Please note that 5 more Texas counties were added to the list on 10/14/08 (Gregg, Harrisson, Rusk, Shelby & Smith).
The specific Texas counties and Louisiana Parishes that now constitute the disaster area are shown below:
TEXAS COUNTIES:
Angelina, Austin, Brazoria, Chambers, Cherokee, Fort Bend, Galveston, Gregg, Grimes, Hardin, Harris, Harrison, Houston, Jasper, Jefferson, Liberty, Madison, Matagorda, Montgomery, Nacogdoches, Newton, Orange, Polk, Rusk, Sabine, San Augustine, San Jacinto, Shelby, Smith, Trinity, Tyler, Walker, Waller and Washington.
LOUISIANA PARISHES(COUNTIES):
Acadia, Beauregard, Calcasieu, Cameron, Iberia , Jefferson, Jefferson Davis, Lafourche, Plaquemines, Sabine, St. Mary, Terrebonne, Vermilion and Vernon.
