It’s been about a month since Hurricane Matthew made landfall on the Florida coast. Hopefully you stayed safe and are well into the clean-up and rebuilding phase.
If you find yourself in one of the affected areas, you may be eligible for tax relief from the IRS. If you live in certain parts of North Carolina, South Carolina, Georgia, Florida or Virginia and previously applied for and were granted an extension on your 2015 taxes, you’re eligible for another extension of the deadline. Rather than your 2015 returns being due last month, they’re now due March 15, 2017. The new date may also apply if your accountant or tax advisor is located in one of the affected areas.
In addition to researching the deadline issue, we also talked to accountant and writer Eric Nisall about some of the tax implications of living in an area that has recently been affected by a disaster.
What Can Be Claimed and What Can’t
If you live in a federally declared disaster area, you may be able to declare the loss of income caused by having to rebuild. These deductions could very well lower your tax bill. That said, the IRS has some very specific guidelines around what can be claimed and under what circumstances.
Nisall said that in many cases, homeowners never actually have to claim the loss on their taxes for home repair.
“There is an inherent difficulty in dealing with casualty losses,” said Nisall. “This is because most people have insurance, and that is the first call made after a natural disaster hits. If the insurance covers the entire loss then there is no loss to be claimed as a tax deduction.”
Note that if your insurance covers the claim, it’s more beneficial to be repaid for any losses you suffer than it is to claim a loss of income on your taxes.
Depending on the nature of the loss and what’s involved in the repair process, it may take a while for your insurance company to pay you. You can help the process along by taking the right steps when you file a claim.
Where things start to get tricky is when your insurance only covers part of the loss or nothing at all. Under the right conditions, you may be eligible for tax relief.
Deductions and How They’re Calculated
If there’s anything insurance doesn’t cover, there’s a chance you may get a tax break. However, this comes with some stipulations you should be aware of.
For starters, you have to be able to accurately value the personal property lost that wasn’t covered by insurance.
“For instance, in valuing the loss of a house only the purchase cost plus the costs of improvements go into calculating the loss deduction,” Nisall said. “It doesn’t matter what the market value is at the time of the loss.”
Let’s say your house was purchased for $200,000. When the hurricane rolled through, your home suffered $50,000 worth of damage. Of that, your insurance covered $40,000. You would therefore have a $10,000 loss of income.
After you determine your loss, there are just a couple more steps before you can claim it.
“If there is a case where insurance doesn’t cover the entire loss, then the remaining amount must exceed 10% of the taxpayer’s AGI (adjusted gross income) plus $100,” Nisall said. “Only the losses amounting to greater than that figure can be claimed.”
Let’s say your income for the year in which your house was damaged was $70,000. Under IRS rules, 10% of your adjusted gross income must be subtracted from the amount of the loss for purposes of your tax deduction. This amounts to $7,000. Then you also have to subtract $100 for each incident that caused damage. Since the hurricane is the sole source of damage, the total subtracted from the claim comes to $7,100.
After subtracting this amount from your original $10,000 loss, you would be left with a $2,900 casualty loss deduction.
When to File Your Deduction
Typically, if you suffer a total loss from something like a wrecked car, you have to declare the loss in the tax year in which it occurred. So if you had the misfortune of being in an accident tomorrow, you would have to wait until 2017 to declare it on your 2016 return.
However, if you live in a federally declared disaster area, you have options. You can either choose to wait and claim the deduction on your taxes for the present year or file an amended return for the previous year. In our hurricane example, since Matthew occurred this year, you can file an amended return for 2015. The advantage of this is that it might lower your income enough to result in additional refund money.
If you don’t feel comfortable crunching the numbers yourself, consider consulting a tax preparer to do the math and figure out what makes the most sense for you.
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