Disasters and Tax Relief

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By Julie T. Houth, Esq.

The aftermath of a natural disaster can leave individuals and their families in shambles. Taxes are probably the last thing on their minds, but tax laws do offer some help for disaster victims. If the natural disaster is a federally declared disaster, taxpayers can typically choose to deduct the loss in the tax year the disaster occurred or the year prior, through an amended return if necessary. In other words, victims of a federally declared disaster could use their tax filing to obtain much needed cash.

According to the Internal Revenue Service ("IRS"), Congress enacted special tax relief to help taxpayers and businesses recover from the impact of 2016 qualified disasters, and the following 2017 qualified disasters: Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires. This special relief is in the Disaster Relief and Airport and Airway Extension Act of 2017, the Tax Cuts and Jobs Act of 2017, and the Bipartisan Budget Act of 2018.

Taxpayers can review the list of recent tax relief provided by the IRS in disaster situations based on the Federal Emergency Management Agency's ("FEMA") declarations here: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations. Although there are currently no disasters listed for New York, it is possible that New Yorkers have family members outside of New York State that were affected by these disasters. This information is also good to know for future reference in the event there is a disaster in another area where friends and family are located. Below is a discussion of some federally declared disaster areas and some relief taxpayers can elect.

Special Rules for Qualified Disaster Losses: How Individuals Can Claim

The definition of a disaster loss is a loss that occurred in a federally declared disaster area that is attributable to a federally declared disaster. While a disaster loss is a type of casualty loss, special rules apply that usually provide more favorable tax treatment for "qualified" disaster losses.

According to the IRS, taxpayers can claim a qualified disaster loss for personal casualty losses resulting from federally declared disasters that occurred in 2016, as well as certain 2017 disasters. Below is more information on what is deemed a 2016 and 2017 qualified disaster:

(1) A 2016 qualified disaster is a major disaster declared by the President of the United States under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act in calendar year 2016. A 2016 qualified disaster area is an area for which such a major disaster was declared.

(2) A 2017 qualified disaster includes the following federally declared disasters: Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires. These disasters were declared by the President of the United States under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act in calendar year 2017. Not all 2017 federally declared disasters are considered 2017 qualified disasters. Only Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires are considered 2017 qualified disasters for special disaster tax relief purposes.

The IRS directs taxpayers to Publication 976 for more information about Disaster Relief, which can be found here: https://www.irs.gov/pub/irs-pdf/p976.pdf

The publication discusses, amongst other things, the following:
• Qualified 2016 disasters declared by the President in 2016
• Hurricane Harvey or Tropical Storm Harvey disaster areas, covered disaster areas and disaster zones
• Hurricane Irma disaster area, covered disaster area and disaster zone
• Hurricane Maria disaster area, covered disaster area and disaster zone
• California wildfire disaster area, covered disaster area and disaster zone
• Victims of California wildfires, flooding, mudflows and debris flows

Note that these special rules apply only to individuals with a U.S. income tax filing requirement with the IRS. The IRS advises, "Bona fide residents of Puerto Rico or the U.S. Virgin Islands may wish to seek guidance from the Department of the Treasury of Puerto Rico or the USVI Bureau of Internal Revenue regarding the extent to which any such relief may apply when filing their Puerto Rico or USVI income tax return."

Qualified Disaster Losses: How Individuals Can Claim

Qualified disaster losses are claimed on IRS Form 4684, Casualties and Thefts.

Below are general rules to consider:

(1) The $100 limitation per casualty increases to $500 for net qualified disaster losses. Taxpayers must use $500 as the reduction when determining your qualified disaster loss.

(2) The 10 percent of adjusted gross income limit doesn't apply to net qualified disaster losses. Taxpayers are allowed a deduction for the entire portion of the disaster loss that is not covered by insurance or other reimbursement claims that exceeds $500.

(3) Taxpayers can increase their standard deduction by the amount of your net qualified disaster loss instead of itemizing deductions on Schedule A. You can deduct 2016 and 2017 qualified disaster losses for both regular and AMT purposes without itemizing other deductions on Schedule A. See the Schedule A instructions for more detail.

Also see IRS Publication 976 on information about safe harbor methods taxpayers may use to calculate the amount of your casualty losses for your personal-use residential real property damaged or destroyed.

How to Claim Losses on the Federal Tax Return for Any Federally Declared Disaster

If taxpayers have a casualty loss attributable to a federally declared disaster that occurred in an area warranting public or individual assistance or possibly both, taxpayers can deduct the loss in the tax year before the loss occurred. In other words, taxpayers may apply this rule to claim qualified disaster losses that occurred in 2017 on their 2016 return. For example, taxpayers can file their tax return electronically if they are claiming the loss on their tax year 2018 federal tax return that is generally due April 17, 2019.

If taxpayers already filed their tax return for the year, taxpayers can amend it to claim their qualified disaster loss by filing a Form 1040X. Taxpayers must indicate "Federally Declared Disaster" at the top of the tax return. Amended tax returns can take up to 16 weeks to process. Note that the deadline to deduct the loss on the 2016 return has passed because taxpayers needed to file the amended return on or before October 15, 2018.

If a person has not filed a 2016 tax return and they want to deduct or increase their standard deduction by their net qualified disaster loss on their 2016 tax return, that person must file on paper and may not file electronically. Use either Form 1040 or Form 1040NR. To figure your net qualified disaster loss, see the Instructions for Form 4684. You must indicate "Federally Declared Disaster" at the top of your tax return as outlined in the 2016 Form 4684 instructions. Paper Form 1040 processing can take up to six weeks. Note that tax penalties like failure to file, may apply because the return is filed late.

For more information about special tax law provisions to help taxpayers and businesses recover from the impact of 2016 and 2017 qualified disasters, see the most updated version of IRS Publication 976. This publication includes information about additional tax relief for individuals who may be able to use 2016 earned income to figure the earned income credit and additional child tax credit.

Final Thought

Navigating tax laws can be difficult without professional help. This article is meant to be a guide in similar situations and is not an all-inclusive list of what to do. It is highly recommended that taxpayers seek out tax professionals that can help them file their tax return or amended return and appropriately select available tax remedies for the particular disaster that affected them. In addition, a tax professional can help to determine the tax year to claim a particular disaster loss. Affected taxpayers can also identify themselves to the IRS or ask disaster-related questions by calling the special IRS disaster hotline at 1-866-562-5227.

Julie T. Houth, Esq., LL.M (Taxation) is a staff attorney for Robbins Geller Rudman & Dowd LLP, a law firm with over 200 lawyers across the nation specializing in complex litigation representing plaintiffs in securities fraud, antitrust, corporate mergers and acquisitions, consumer and insurance fraud, multi-district litigation, and whistleblower protection cases. Ms. Houth is based at the firm's headquarters in San Diego, California. She serves as one of the New York State Young Lawyers Delegate to the American Bar Association House of Delegates and is the Co-Editor in Chief of Electronically In Touch.


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This page contains a single entry by Julie Houth published on November 22, 2019 12:00 AM.

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