Top Ten Tax Tips for Disaster Victims

Special tax law provisions may help taxpayers recover financially from the impact of a disaster, especially when the President declares a location to be a major disaster area. Both individuals and businesses in a federally declared disaster area can get a faster refund by claiming losses related to the disaster on the tax return for the previous year, usually by filing an amended return.

Here are the top 10 tips to help you get the proper benefits after a disaster:

Take photographs to document damage to your property or belongings. This will be helpful in calculating the amount of your loss. It may also prove beneficial to take photos showing the condition of the property after it is restored or replaced.

Keep your receipts. Certain expenses may be deductible or helpful in determining your loss. Receipts for contracting work can establish the extent of your loss and substantiate the use of insurance reimbursements (see item 5 below).

Food, medical supplies and other forms of assistance are not taxable, nor do these items reduce the amount you can claim as a loss unless they replace lost or destroyed items.

File your insurance claim in a timely manner. If your property is covered by insurance, it's important to file the claim as soon as possible because any reimbursement must be subtracted when calculating your loss.

Replace property with similar property to avoid paying taxes on any gain from insurance proceeds. However, replacement property does not have to match item-for-item. Because insurance proceeds for the home and its contents are considered a common pool of funds, you can use more of the money to replace the house than its contents, or vice versa. If you qualify, a gain related to a personal residence can be excluded using the sale-of-home exclusion rules.

Reimbursements for losses aren't taxable, unless you come out ahead by receiving more for the property than its basis (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 you replace lost, damaged or destroyed items within 2 years after the loss occurs.

You may be able to claim a casualty loss on your tax return.

The loss amount is based on the lower of 2 numbers:

Either the price paid for the property plus any improvements (called the basis) prior to the casualty, or the property's decline in market value caused by the disaster, which, in some cases, can be determined by repair costs.

The deductible amount is reduced by insurance and most other nontaxable reimbursements.

If the property is not used for business, the deductible amount is reduced by 10% of the taxpayer's adjusted gross income and then reduced again by $100 ($500 for 2009). The 10% floor does not apply to net disaster losses sustained In 2008 or 2009.

A nonbusiness loss generally is claimed as an itemized deduction on Schedule A. But a net disaster loss sustained in 2008 and 2009 is added to your standard deduction. You don't have to itemize to claim these losses.

The cost of cleaning up or making repairs can't be considered part of your casualty loss. However, you can use the cost for repairs as a basis to determine the decrease in fair market value.

The IRS will waive fees and expedite requests for copies or transcripts of your federal tax return. If you need information from your tax return, use Form 4506-T, Request for Transcript of Tax Form, to request a transcript of your federal tax return. A transcript shows most of the line items from your return. You may also use Form 4506-T to request account information (payment of estimated taxes, etc.) and transcripts of W-2s and 1099s. If you need greater detail on prior returns than is provided by transcripts, you may request a photocopy of a prior return and any attachments by submitting Form 4506, Request for Copy of Tax Form. You may obtain these forms by calling the IRS toll-free disaster hotline at (866) 562-5227 or by going to www.irs.gov.

Special considerations for federally declared disaster areas:

You have up to 4 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 can choose to deduct a loss on the current-year return or amend the preceding year's return, whichever helps your current financial or tax situation the most.

You may have filing and payment deadlines postponed for a time specified by the IRS. Any interest that normally would apply to late payments is waived in this situation.

Also Read:

Disaster Relief
Amended Return
Address Changes