How to claim casualty losses after a disaster
There were 103 federal disaster declarations last year, the most since 2012. Of these, 46 were major disaster declarations. With 32 disaster declarations through April (26 major disasters), this year is on track for even more disasters. These counts do not include the local and regional disasters that did not warrant a federal declaration, though they could have still caused harm to taxpayers and damaged their property. Whatever the disaster that taxpayers experience, they may be able to use their tax return to recover financially.
Casualty losses can provide substantial tax relief
Many homeowner’s and renter’s insurance policies have restrictions, including some that don’t cover natural disasters or flooding. In this case, taxpayers may find some financial relief for their recovery costs for damaged or lost property by claiming their unreimbursed expenses as casualty losses. This includes deductibles on any disaster-related claims, whether or not the government declared a national disaster.
Both the number of taxpayers who claim a casualty loss and the losses claimed can vary. For example, in 2005 more than 800,000 taxpayers claimed casualty losses including those related to Hurricane Katrina and the other Gulf Coast hurricanes. The average loss claimed was about $18,000. In 2012 about 160,000 taxpayers claimed casualty losses including those related to Hurricane Sandy but the average loss claimed was almost $31,000. In any case, the tax benefit of claiming a casualty loss can be substantial.
Also, depending on the type and scope of the disaster and federal assistance offered, the IRS may provide additional relief in the form of postponements of filing and payment deadlines. These postponements can be very helpful to affected taxpayers when a major disaster occurs close to a deadline, such as the October 15 extended filing deadline for individuals. Taxpayers can check Tax Relief in Disaster Situations to see if a postponement has been granted.
Federal disaster declaration opens options on the tax return
Taxpayers in a federal disaster area who incur disaster-related casualty losses have a choice about when to claim their losses. A disaster-related casualty loss may either be claimed on a tax return for the year the disaster occurred or on the prior year’s original or amended return.
For example, a loss occurring in 2017 may be claimed on the taxpayer’s 2017 tax return filed in 2018, or on an original or amended 2016 return filed in 2017. While claiming the loss on the 2016 return results in a faster tax refund, waiting to claim the loss may result in greater tax savings.
Tax forecasting and planning plays an important but complex role in recovering from a disaster. Taxpayers should weigh their need for additional resources to cover their immediate costs against their projected tax outcome of waiting to claim the loss on the current year return they’ll file next year. They also need to consider the time it will take to calculate and substantiate their deductible loss.
For example, if a taxpayer in Louisiana had $10,000 in unreimbursed losses related to severe storms and tornadoes in February 2017, they could amend their 2016 return they had already filed to claim those losses. This would accelerate the tax benefit which could help them if they need that benefit as early as possible. However, if this taxpayer had twin daughters who are expected to graduate from college in 2017 and leave their household, they will lose a few tax benefits in 2017, including $8,100 in dependent exemptions. In this case, they may see their tax liability increase in 2017 and choose to wait until they file their 2017 return to claim the casualty losses to help offset that increase.
Record requests will be expedited
Taxpayers affected by a federal disaster may need to reconstruct tax records lost in the disaster to apply for a disaster loan or grant. The IRS will waive the usual fees and expedite requests for a copy of a tax return (Form 4506) or for a transcript of a tax return (Form 4506-T).
H&R Block clients can visit a retail tax office to get copies of their tax returns or access their MyBlock account, even if they prepared their taxes on their own using H&R Block software.
H&R Block or Block Advisors clients can visit any year-round office for tax assistance and to request copies of tax returns prepared in H&R Block offices or using H&R Block software. Taxpayers may also contact the IRS at (800) 829-1040 or www.irs.gov to get copies of past tax returns and transcripts.
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