Hurricane Irene was devastating to many people in New Jersey. The President of the United States declared New Jersey, and all 21 of its counties, a federal disaster area. This means that individuals and businesses or who stored paperwork and records necessary to meet certain tax filing deadlines and were seriously affected by Irene may qualify for special tax relief. Officially recognized relief workers may also qualify. This article discusses some of the tax relief available.
Certain Filing Deadlines are Postponed
The President’s declaration permits the Internal Revenue Service (IRS) to postpone certain filing deadlines for affected taxpayers. Tax deadlines falling between August 27, the start of the hurricane, and October 31 have been postponed to October 31, 2011. This includes third quarter estimated tax payments, which are normally due by September 15, 2011. The IRS should not charge interest and penalties for filings due during this time. Interest and penalties may continue to accrue (add up) on any amount that you already owe, but the IRS should not assess interest and penalties on tax payments due between August 27 and October 31, 2011.
If you get a notice with interest and penalties on an original or extended filing that was due during the postponement period, you can call the telephone number on the notice and ask that the IRS adjust the account.
Also, if you have a current issue with the IRS—like an exam or collection issue—make sure you let them know if you have suffered a hardship due to the hurricane so they can take that into consideration.
Free Copies of Previous Years’ Tax Returns
Normally, if you want a copy of a tax return filed in a previous year, the IRS will charge you $57 per return. Because paperwork is often lost or destroyed in a disaster, the IRS will waive these fees for people affected by the hurricane.
You may also ask that the copies of your tax returns be expedited (sent more quickly) so you will get them sooner. To request an expedited copy of a previously filed tax return, use IRS Form 4506, Request for Copy of Tax Return. Fill out the form, write “Hurricane Irene” clearly in red ink on the top of the form, and send it to the IRS.
Note that the IRS is generally only required to maintain tax returns for seven years, so while you can and should request returns for earlier years if you need them, they may no longer be available. Remember to always keep a copy of anything that you mail to the IRS for your records!
Personal Property (Casualtyy) Losses
Normally, personal property losses are not tax deductible. There are exceptions for losses due to things like storms, floods, or fire. But even then the losses usually can only be claimed in the year in which they occurred. Because New Jersey was declared a federal disaster area, however, personal property losses caused by the hurricane may be deductible on your 2011 tax return or you can amend your 2010 tax return to include the losses. This may seem strange, but we’ll talk about why the IRS allows taxpayers a choice of two years later in the article.
It’s important to note that deductions for casualty losses are treated like itemized deductions. This means that if you generally take the standard deduction, the casualty loss provisions may not help you. Also, what you consider to be a loss and what the IRS will allow you to deduct as a loss are two very different things. So, unless your storm losses are very high, the casualty loss provisions may not provide you with much benefit.
Determining the Loss. First, make a complete list of anything you lost in the hurricane. This includes appliances, furniture, clothing, and other belongings. IRS Publication 584, Casualty Disaster and Theft Loss Workbook, can help you make the list. So far, this is the easy part. The difficult part is assessing and proving the value of the items so that the IRS will allow the loss. It is the taxpayer’s burden to prove the actual amount of the loss. If the IRS questions your return, you will need to provide proof of the items’ fair market value (the amount of money you could get if you sold these things). So, for example, if the storm destroyed a 27-inch tube television that you purchased in 2004, you cannot claim the amount it will cost you to replace. You are only permitted to take a loss for what it is worth today. The Salvation Army and Goodwill have donation guides that may help you with the valuation of your items.
If you are claiming a loss to your home, you must be able to show the change in the property’s value because of the storm damage. You must prove (1) what you paid for the house, (2) the cost of any improvements, and (3) the value of the house after the storm. An appraisal for insurance or federal disaster loans can be used. If you can’t get an appraisal, you can use the cost of repair and cleanup as a basis for your loss. Remember, you will need to be able to substantiate (prove) your expenses, so make sure you are keeping your receipts. If you haven’t kept them, try to get copies now. It may be a hassle after everything you’ve been through, but it’s a lot easier to ask a business to give you a receipt for services recently purchased than to do it months from now.
If you have an insurance policy, you must file a timely insurance claim or your loss may be denied. If you’ve received a reimbursement for anything, you can’t claim a loss—this includes reimbursements through an insurance company, federal or state government, or a charity. Also, the cost of the repair or cleanup must be reasonable, and the repairs can’t improve the property. This means that you can’t spend a lot of money to make the property worth more than it was before the storm and then charge the improvement as a “loss.”
Once you determine the amount of your loss, the IRS will then reduce it a bit further—by a flat $100 and then by 10% of your adjusted gross income. The amount of your adjusted gross income in a given year impacts the amount the IRS will allow you to claim as a loss. How income can impact the amount you claim is important to understand as we get into the next section, which discusses things to consider in deciding whether to take the loss in 2011 or whether to amend last year’s tax return to include the loss.
Deciding what year to claim the loss. So you’ve made your lists, gotten appraisals, kept receipts. Now you need to decide whether you want to wait to claim the losses on your 2011 return or whether you are going to amend (revise) your 2010 tax return. The first question you are probably asking is why does it matter? As we discussed in the last section, depending upon other income you received in a given year, claiming the casualty loss in 2010 or 2011 can make a big difference. Here’s an example:
Facts: Penny had $3,000 in losses due to the hurricane. In 2010, Penny had an adjusted gross income of $23,000. But in 2011, Penny was laid off from work and has been receiving unemployment benefits. Based on what she earned in 2011 and the amount she is getting in unemployment, Penny expects that she will have a lower adjusted gross income of about $16,000 for 2011.
2010: The IRS will take Penny’s $3,000 in losses and immediately deduct $100, giving her a loss of $2,900. Then the loss is further reduced by 10 percent of Penny’s $23,000 adjusted gross income, or $2,300 ($23,000 x 10% = $2,300). This means that the total that Penny can claim in losses if she amends her 2010 tax return is $600 ($2,900 - $2,300 = $600).
2011: The IRS will take Penny’s losses and immediately deduct $100, giving her a loss of $2,900. Then the loss is further reduced by 10 percent of Penny’s $16,000 income, or $1,600 ($16,000 x 10% = $1,600). This means that the total that Penny can claim in losses if she waits to file her 2011 tax return (assuming her prediction of income is correct) is $1,300 ($2,900 - $1,600 = $1,300)
So, you can see that the amount of income in a given year can result in very different allowable casualty losses. In this case, Penny will be able to claim more if she waits to claim the loss on her 2011 tax return (she can only claim $600 in losses in 2010, as opposed to $1,300 in 2011).
But there is a reason, even if you think you might get more if you wait, to amend last year’s return to include the loss—it may get you a refund now. If you have paid all of the taxes that you owe for 2010, amending last year’s tax return to include the casualty loss can result in an immediate refund being issued to you, which can help you pay for the repairs you’ve made now.
If you can’t remember how much you paid in taxes last year, you can order an Account Transcript from the IRS. These are free. An account transcript is a printout from the IRS that contains your tax history for a given tax year. You can order account transcripts using the automatic transcript line, 1 -800-908-9946.
Like so much related to taxes, this is complicated! This article addresses only a few of things you may want to consider when thinking about disaster-related casualty losses. There are many other considerations, and it’s always best to consult with a tax preparer or accountant to help you make the decision. The IRS also has a casualty loss department, and a representative there may be able to give you more information about your particular situation. You generally have until the deadline to file your 2011 tax return (in April 2012) to make a decision about whether to claim your casualty losses in 2010 or 2011.
This article is from the October 2011 issue of Looking Out for Your Legal Rights®.
This information last reviewed 11/2/11.