TAX INFORMATION FOR FLOOD VICTIMS

Farm Bureau Tax Service

May, 2010

 

 

Tax benefits available to the recent flood victims

 

Individuals suffering financial losses from the recent floods may benefit from tax laws allowing deductions for casualty losses, thereby qualifying them for an increased tax refund or reduction in tax owed over one or more years.  Taxpayers may deduct the loss or partial loss of their home, household items and motor vehicles.

 

Special tax provisions for federally declared disaster areas may also enhance the tax benefit for losses incurred in 2010 allowing them to be deducted on the 2009 tax return when casualty loss provisions were more beneficial.  Taxpayers in this situation have until April 15, 2011 to amend their 2009 return for this purpose.

 

Legislation has been proposed to extend the more advantageous 2009 casualty loss provisions to 2010, but the legislation has not been signed at the time of this publication.

 

Who should consider amending the 2009 return to deduct 2010 casualty losses?

 

Any person who incurred a non-business loss in the recent floods and is located in a federally declared disaster area should investigate the benefit of electing to file an amended 2009 tax return versus reporting their loss on the 2010 return.  Even if legislation is passed, the taxpayer may still receive a greater benefit in 2009 if their taxable income was higher.  Businesses may also benefit from electing to file an amended 2009 return but the tax law differences between 2009 and 2010 may not be as beneficial.

 

Counties designated as federally declared disaster areas

 

There were 45 counties that were included: Benton, Cannon, Carroll, Cheatham, Chester, Clay, Crockett, Davidson, Decatur, DeKalb, Dickson, Dyer, Fayette, Gibson, Giles, Hardeman, Hardin, Haywood, Henderson, Hickman, Houston, Humphreys, Jackson, Lauderdale, Lawrence, Lewis, Macon, Madison, Marshall, Maury, McNairy, Montgomery, Obion, Perry, Robertson, Rutherford, Shelby, Smith, Stewart, Sumner, Tipton, Trousdale, Wayne, Williamson, and Wilson.

 

How is a casualty loss calculated for tax purposes?

 

Due to several limitations, casualty loss tax deductions do not equal the full financial loss that taxpayers may have realized.

 

A casualty loss for tax purposes equals:

 

  1. The lesser of:
    1. Adjusted basis before the casualty event, or
    2. Decrease in the Fair Market Value (FMV) of the property as a result of the casualty
  2. Minus any insurance or other reimbursement received or that is expected to be received.

 

Definitions:

                Adjusted Basis – Generally is equal to original cost plus improvements for personal-use property if

                                          acquired via purchase.

                Fair Market Value – Price for which you could sell your property to a willing buyer when neither

                                                  of you have to buy or sell and both know all relevant facts. Often determined by 

                                                a qualified appraiser.

 

For non-business losses, the result is reduced by $500 (2009) / $100 (2010) per casualty and further reduced by 10% of Adjusted Gross Income (AGI).  In addition, taxpayers are required to itemize their deductions to claim the casualty loss.

 

Special Rules in 2009 for Federally Declared Disasters:

  1. The 10% of Adjusted Gross Income (AGI) limitation is waived.
  2. Taxpayers are not required to itemize their deductions to claim the casualty loss.
  3. Losses in excess of current year income may be carried back five years (Net Operating Loss)

      

 

Example of Loss Calculation under 2009 Tax Rules

 

                                                                        House                                       Furnishings

1.       Cost                                                           $134,000                                   $10,000

2.       FMV before Disaster                                    $147,500                                   $  8,000

3.       FMV after Disaster                                        100,000                                       5,000                                   

4.       Decrease in FMV (Line 2 – Line 3)               $  47,500                                   $  3,000

5.       Smaller of Line 1 or Line 4                          $  47,500                                   $  3,000

6.       Subtract Estimated Insurance                                             -0-                                                       -0-           

7.       Loss after reimbursement                              $  47,500                                   $  3,000

 

8.       Total Loss                                                                                                   $50,500

9.       Subtract $500                                                                                                       500

10.   Loss after $500 rule                                                                                     $50,000

11.   Subtract personal casualty gains                                                                           -0-

12.   Deductible Net Disaster Loss                                                                      $50,000

 

Money spent to repair damage and for cleanup is not deductible.  However, these amounts are an excellent measure of the decrease in fair market value (FMV) if the repairs are actually made, are not excessive, are necessary to bring the property back to its original condition, take care of the damage only, and do not cause the property to be worth more than before the casualty.  Therefore, it is important to maintain copies of all repair bills and any other records of the work done and how much it cost.

 

What is required for proof of loss?

 

The type of casualty and when it occurred.

That the loss was a direct result of the casualty.

That you were the owner of the property or contractually liable to the owner for the damage.

Whether a claim for reimbursement exists or if there is reasonable expectation of recovery.

Note:  Taking photographs is an excellent method of establishing the extent of the damage.

 

Tax Tip:

 

Unless the special 2009 tax provisions relating to casualty losses for federally declared disasters are extended to 2010, taxpayers will likely benefit from amending their 2009 return to claim their deduction.  Everyone’s situation is different therefore it is important to consult with a tax professional to determine how you can receive the greatest tax benefit.

 

Farmers and other businesses incurring financial losses during the recent floods may also qualify for tax

benefits. Due to the IRS record requirements for business, information necessary to determine tax losses should be readily available.  In order to determine the greatest tax benefit, businesses should calculate their 2010 taxable income before deciding on amending their 2009 tax return to claim 2010 casualty tax losses.

 

Additional information may be found at the following website:

 

For more information regarding the special rules for filing an amended return visit the following IRS website:   http://www.irs.gov/irs/article/0,,id=203056,00.html