Disaster tax relief: What you need to know
Hurricanes, floods, tornadoes, ice storms, and other severe weather can do major damage to your home and business. If a disaster strikes and damages your home or business, you’ll want to know what to do now and in the coming weeks.
Also, if you’re looking to safeguard your important documents before a disaster happens, we’ve outlined four simple steps you can take now.
Getting relief after a disaster
Special tax-law provisions might help you recover financially after a disaster. This especially applies if the president declares your location a major disaster area.
Timing considerations for disaster relief
If you live or own a business in a federally declared disaster area eligible for public or individual assistance (or both), you can get a faster refund by claiming losses related to the disaster on your previous year’s return. Do this by filing an amended return. If it makes more sense for your current financial or tax situation, you can deduct a loss on your current-year return.
Additional considerations for federally declared disaster areas:
- You have up to four years after the close of the first year in which any gain was realized to replace your principal residence or pay tax on the gain.
- You might have filing and payment deadlines postponed for a time specified by the IRS. Any interest that normally would apply to late payments may be waived in this situation.
Disaster relief documentation and reporting tips
These tips can help you get the benefits you’re due after a disaster:
- Take photographs to document damage to your property or belongings. This will be helpful in calculating the amount of your loss. You might also benefit if you take photos showing the condition of the property after it’s restored or replaced.
- Keep your receipts. Certain expenses might be deductible, and they could be helpful in determining your loss. Receipts for contracting work can show how much you lost and confirm the use of insurance reimbursements (see below).
- Food, medical supplies, and other forms of assistance aren’t taxable. These items also don’t reduce the amount you can claim as a loss unless they replace lost or destroyed items.
- File your insurance claim as soon as possible. This is important since you must subtract any reimbursement when calculating your loss.
- Replace property with similar property to avoid paying taxes on any gain from insurance payments. However, replacement property doesn’t have to match item-for-item. Insurance payments for the home and its contents are from a common pool of funds. So, you can spend more money replacing the house than on replacing its contents, or vice versa. If you qualify, you might be able to postpone a gain related to a personal residence. This applies if you use the insurance reimbursement to repair or replace your home.
- Reimbursements for losses aren’t taxable unless you receive more for the property than its basis. The basis is the original cost plus the cost of improvements. Even if the reimbursement is more than the basis, you don’t have to pay tax currently if both of these apply:
- You replace lost, damaged, or destroyed items.
- You replace the items within:
- Two years after the end of the first tax year when any part of the gain on conversion is realized
- Three years for real property used for business or held for investment
- Four years if the property is a main home in a federally declared disaster area
- You might be able to claim a casualty loss on your return.
- The loss amount is based on the lower of these two numbers:
- Property’s adjusted basis prior to the casualty. The property’s adjusted basis is usually the price paid for the property plus any improvements.
- Property’s decline in market value caused by the disaster. In some cases, you can determine this by repair costs.
- Reduce the deductible amount by insurance and most other nontaxable reimbursements.
- If the property isn’t used for business, reduce the deductible amount of the disaster loss by $100. Then, further reduce it by 10% of your adjusted gross income (AGI). Caution: Certain qualified disaster losses are eligible to be claimed as an additional standard deduction subject to a $500 reduction (no AGI reduction applies). Generally, these are qualified disaster losses attributable to certain disasters that occurred in years 2016-2020.
- Claim a nonbusiness disaster loss sustained during the year in 2021 as an itemized deduction on Schedule A.
- The loss amount is based on the lower of these two numbers:
- You can’t consider the cost of cleaning up or making repairs part of your casualty loss. However, you can use the cost for repairs as a basis to determine the decrease in fair market value (FMV).
- The IRS will waive fees and expedite requests for copies or transcripts of your federal return. If you need information from your return, use one of these forms to request a transcript of your federal return:
- Form 4506-T: Request for Transcript of Tax Form
- Form 4506T-EZ: Short Form Request for Individual Tax Return Transcript
A transcript shows most of the line items from your return. You can also use Form 4506-T to request transcripts of W-2s and 1099s and account information — like payment of estimated taxes.
If you need greater detail on prior returns than is provided by transcripts, you can request a photocopy of a prior return and any attachments by submitting Form 4506: Request for Copy of Tax Form.
You can obtain these forms:
- By calling the IRS toll-free disaster hotline at 866-562-5227
- At www.irs.gov
Preparing before a disaster
Disasters can strike at any time and when it happens, you’ll have a lot on your mind. If you’re able to find time to safeguard your financial records before an event occurs, you’ll thank yourself later.
The IRS suggests you take these steps to protect your documents from natural disaster:
- Create a backup set of records electronically. Keep a copy of your records in a safe place that’s stored away from the original set. Records that should be backed up include:
- Bank statements
- Tax returns and records
- Insurance policies
To create electronic duplicates of your paper records:
- Scan the paper records into an electronic format.
- Save those files to an external hard drive or CD.
- Store the files at another location or save them to an offsite online server.
- Document your valuables. Photograph or videotape the contents of your home, especially to document valuable possessions. A photographic record can help you prove the market value of items for insurance and casualty-loss claims. Store the photos or video with a friend or family member who lives outside the area.
- Review and update your emergency plans annually. If you’re an employer, update emergency plans when you hire new employees or when your organization changes functions.
- Check on fiduciary bonds. If you’re an employer and you use a payroll service, ask the provider if it has a fiduciary bond in place. That bond could protect you in the event of default by the payroll-service provider.
Need help navigating your taxes after a disaster? We’re here to help
No matter what way you file your taxes, we can help with how to claim disaster relief on your taxes.
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