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Hurricane Harvey resulted in tremendous property damage for Houston residents. For families that were impacted, it is important to keep a detailed accounting of the damage and repair costs to recoup a portion of the loss through tax deductions.
Two Ways to Recover
Because Harvey was a federally declared disaster, people that suffered storm damage can elect to claim the loss in 2017, the tax year in which the loss occurred, or 2016, the immediately preceding year. To quote an article from Penchansky & Co, CPAs:
By taking the deduction for a 2017 disaster area loss on the prior year (2016) return, you may be able to get a refund from the IRS before you even file your tax return for 2017, the loss year. You have until six months after the original due date of the 2017 return to make the election to claim it on your 2016 return, in most cases by filing an amended 2016 return to claim the disaster loss. Before making the decision to claim the loss in 2016, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund.
If you elect to claim the loss on either your 2016 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs.
If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, whether the loss is claimed on the 2016 or 2017 return, and results in negative income, you may have what is referred to as a net operating loss (NOL). When there is an NOL, the unused loss can be carried back two years and then carried forward until it is all used up (but not more than 20 years), or you can elect to only carry the unused loss forward.
Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL.
Limit to Tax Deduction
Under current law, casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI) —the number at the bottom of the front page of the 1040 form. However, the 10% limit didn’t apply to losses from Hurricane Katrina, but it did apply to losses from superstorm Sandy. So, while the 10% threshold still applies, there is a chance that the rules change over the next few months.
Determining Loss & Keeping Good Records
IRS Publication 584 is a workbook that provides a helpful template for tracking the damage in every room of the home including the typical contents. For every item in the workbook the tax filer will want to have pictures, and receipts that show the extent of the damage to verify the amount of loss should she ever be audited.
As stated on pages 1 & 2 of the workbook:
You may deduct losses to your home, household goods, and motor vehicles on your federal income tax return. However, you may not deduct a casualty or theft loss that is covered by insurance unless you filed a timely insurance claim for reimbursement. Any reimbursement you receive will reduce the loss. If you did not file an insurance claim, you may deduct only the part of the loss that was not covered by insurance. Amount of loss. You figure the amount of your loss using the following steps.
1. Determine your cost or other basis in the property before the casualty or theft.
2. Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. (The decrease in FMV is the difference between the property's value immediately before and immediately after the casualty or theft.)
3. From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive.
As a result of Hurricane Harvey, the IRS has postponed due dates on several tax filings. (For an update on the changes to the 401k rules see: Using Money From Your Retirement Accounts to Pay for Hurricane Harvey Repairs.) Texas residents living in counties designated by FEMA as a federal disaster area have until Jan. 31, 2018 to make quarterly estimated payments for Sept. 15, 2017 and Jan. 16, 2018, with no penalties.
The Jan. 31, 2018 due date also applies to 2016 tax returns due on Oct. 16. Tax payments due this past April 18 don’t qualify for this extension.
DISCLAIMER: See the IRS workbook for a detailed discussion of the applicable tax rules. This post is for informational purposes only and is not intended as tax advice. Consult with a tax professional to discuss the details of your specific situation.)
Do You Need Immediate Help Recovering From Hurricane Harvey?
If you have been impacted by Hurricane Harvey and need help figuring out your next financial steps, use the button below to schedule a completely free conversation with Jon Swanburg, our head of Financial Planning. (Or click here for a complete list of Hurricane Harvey relief resources compiled by the State Bar of Texas.) We, like many of you, have been helped by so many in the community during this time of crisis and we are eager to pay it forward by offering financial guidance to those in need.
This is not for questions about investments but rather topics like: Who can you contact to reduce utility payments? How do you pay off the credit card debt that may pile up? Or What are the implications of taking a loan from the 401k to pay for repairs?