Sitting here looking out my window at this beautiful sunny day, it is hard to imagine that a few weeks ago the rain had flooded our homes, streets, and caused damage beyond belief. Now that the waters have receded, many are left cleaning up the aftermath and trying to figure out what to do next. We would like to provide you with information that should make the process a little easier.
The term “casualty loss” is the difference between the fair market value before the loss and the fair market value after the loss. In the past, a tax deduction was generally available for personal use property (i.e., non-business property) to those with net losses that exceed 10% of their adjusted gross income (AGI), minus $100. Recently the law changed and eliminated the 10% of AGI requirement for those in a federally declared disaster area in 2008 and 2009. The law now requires a subtraction of $500 from the loss. The new law also allows those who do not itemize their deductions to take the loss in addition to their standard deduction.
While the decline in a property’s value should be ascertained by competent appraisal where possible, the costs of repairing, replacing or cleaning up the property after a casualty can be used to measure the amount of loss or decline in value. It is important to remember the following:
- The repair, replacement and clean up should be necessary to restore the property to its pre-casualty condition;
- The amount spent should not be excessive;
- The repairs should do no more than take care of the damage suffered, and/or
- The post-repair value should be no greater than the pre-casualty value.
In addition, if you have insurance, you must reduce your loss by any insurance proceeds received. This leaves you with your net loss.
For example, if you sustained flood damage to your home and pay $8,000 to have repairs completed that do not increase your property’s value, and the repair cost was reasonable, you would have a tax deduction of $7,500.
If you had flood insurance with a $5,000 deductible and received $3,000 from your insurance company, you would have a $4,500 casualty loss on your return.
You can claim the loss on an amended 2008 return to receive the tax refund quickly, or you can claim it on your 2009 return. If you file an amended return, the IRS suggests you print “Georgia/Severe Storms and Flooding” at the top of the 1040X and 500X forms, so that they can expedite the process of the refund.
The rules for business property are slightly different. If an item is totally destroyed, the amount of loss is the property’s cost, less any depreciation taken.
As of Sept. 28, 2009, the President declared the following counties federal disaster areas that qualify for individual assistance: Bartow, Carroll, Catoosa, Chattooga, Cherokee, Cobb, Coweta, DeKalb, Douglas, Fulton, Gwinnett, Heard, Newton, Paulding, Rockdale, Stephens, and Walker.
If you live in one of the above counties, the following applies to you:
- The IRS is postponing certain deadlines for taxpayers who reside or have a business in the disaster area until December 17, 2009. The postponement applies to return filing (including individual, corporate, estate, trust, partnership, S corporation, estate gift and generation-skipping tax returns) tax payment, employment and certain excise tax returns, and certain other time-sensitive acts due between September 18, 2009 and December 17, 2009.
- The IRS will waive failure to deposit penalties for employment and excise deposits, due on or after September 18, 2009, and on or before October 5, 2009, if deposits were made by October 5, 2009.
- Penalties or interest will be abated only for taxpayers who have an original or extended filing payment or deposit due date, including and extended filing or payment due date that falls within the postponement period.
- The IRS computer system automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief.
If you receive a penalty notice from the IRS, you should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties.
Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline are in the covered disaster area are also entitled to relief. They must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.
All relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area also qualify for relief. The relief applies to any individual who was killed or injured as a result of the disaster, while visiting the covered disaster area.
Grant of Relief
In addition to the above, other things to keep in mind include:
- The relief also includes the filing of Form 5500 series returns.
- Pertaining to like-kind exchanges of property, the relief also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the postponement period.
- The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027.
- Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause.
- The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers.
- Taxpayers should put the assigned disaster designation “Georgia/Severe Storms and Flooding” in red ink at the top of Form 4506, Requested for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.
Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.
- Taxpayers may download forms and publications from the official IRS website, www.irs.gov, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.
At Henssler Financial, our thoughts are with those affected by this disaster. If you have additional questions or would like our assistance, please contact Henssler Financial at 770-429-9166 or [email protected].