When disaster strikes just know that the government has your back. Don’t believe me? Well, the IRS offers some easing of your potentially cataclysmic loss through the tax code, specifically taxpayer disaster relief. This allows you to keep more money in your pocket rather than paying it to Uncle Sam. I suppose the idea is that when your house is destroyed by a hurricane suddenly you need the money more than the tax coffers need it. Let’s take a deeper dive into this wholly charitable dispensation that the IRS so beneficently bestows upon its subjects.

Initially to qualify for disaster relief, you must have gone through a qualified disaster. Even though no one having gone through a disaster would think it’s unqualified, the government has to say it is. For example, Hurricane Harvey and the California wildfires, both occurring in 2017, are qualified disasters. What’s more, a qualified disaster will have a delineated area that it covers, the covered disaster area, generally articulated by county or county equivalent. You’ll need to be inside this zone in order to take advantage of the tax relief offered.

Extended Tax Deadlines

For those affected taxpayers, the IRS generally extends tax deadlines for disaster areas. These extensions don’t always correspond to filing annual tax returns, and may only allow for tax actions that practically fall within the extended period. However, the deadline extension does generally cover all tax actions that can be performed within the timeframe, from filing a return to making a contribution that has a specific deadline as to the date associated with it. It really just depends on what happens to fall within the extension the government has proclaimed. Also, in this context, an affected taxpayer is an individual, a business or sole proprietor, a relief worker, an individual/business/sole proprietorship that has records in the disaster area, an estate with records in the disaster area, a spouse who is eligible for the extended deadline, a business whose records are located in the disaster area, an individual who was killed by the disaster in the disaster area, and any other person declared to be specifically affected.

Increased Deductibility of Charitable Giving

Another thing the government allows for disaster areas is a temporary reprieve of the limit on charitable contributions. Generally, the IRS does not allow deductible charitable giving by individuals to be greater than 50% of adjusted gross income and also imposes a cap on the absolute amount of itemized deductions taken by an individual. However, in the aftermath of a qualified disaster, the government suspends this prohibition and allows for greater deductible giving. If your contribution is made within a prescribed amount of time, to a charity that has a purpose related to the qualified disaster, and you obtain a written record of the contribution at the time you give, then you are eligible to deduct the full amount of your contribution regardless of its size.     

Individual Casualty Loss Deduction

In the context of being tax deductible, your personal casualty losses are those that stem from a qualified disaster. Those losses are deductible with certain requirements, caveats, and restrictions to note. First, you can choose to deduct the loss from a qualified disaster in the previous year to the year it was sustained. Therefore, if you sustained a loss in 2017, you can deduct it on your 2016 tax return. This is sometimes accomplished by filing an amended return. In order to deduct your loss, you’ll need to determine the amount of the loss to the fair market value of the property. In this vein, you can either have a competent appraisal of the property’s damage done or you can tally the amount of the repairs actually made. However, you can also use the IRS provided safe harbor cost index method which gives values related to a number of cost/value variables that are prescribed and can be used without question as long as in good faith. As a final note, you can’t deduct any amount of loss covered and compensated for by insurance. Therefore, if you receive an insurance check for the full amount of your loss, you can’t deduct anything related to that loss. Use Form 4684, Casualties and Thefts, along with Schedule A, Itemized Deductions, to report your loss due to the disaster loss not covered by insurance.

Penalty-Free Distributions from Retirement Accounts

If you sustained losses from a qualified disaster in an area designated as such by the government, you may take up to a $100,000 distribution from retirement accounts such as 401(k)s or IRAs without incurring the 10% additional punitive tax for an early distribution. Note that you can take money from more than one retirement account but the total amount cannot eclipse $100,000. What’s more, even though the amount taken out is taxable and has to be included in your gross income, you can include the amount distributed to you over a period of three years. This means that if you took out $99,000 as the result of a disaster in 2016, then you could include $33,000 for each of three years in 2016, 2017, and 2018. You can even take a distribution from your retirement account without regard to the actual amount of loss you incurred, which means that you don’t have to have incurred any real loss at all, just be in a qualified disaster area. Finally, as an alternative, you can choose to repay the amount taken out as a disaster distribution from your retirement account in up to three years and thus avoid paying taxes on the distribution.

Other stuff   

Here are a few more benefits that the IRS gives you when you are in a qualified disaster area. First, you may be able to calculate your eligibility for the earned income tax credit using the prior year’s income. Next, businesses may be able to claim the employer retention credit on Form 5884-A, Credits for Affected Disaster Area Employers. This credit gives a tax credit on 40% of eligible employee wages, up to $6,000 per eligible employee. The requirements are such that business was conducted with certain employees in the disaster area before the disaster struck, thereafter becoming inoperable any day after the specified date of the disaster, and later those same employees were paid wages after the business reopened. Finally, you can get a copy of your tax return from the IRS, which usually costs $50 per return copy, free of charge if you are in the disaster area. File Form 4506, Request for Copy of Tax Return. This comes in handy if your records were destroyed.

Conclusion

For more information on disaster relief, see IRS Publication 976.

I feel like I’ve been a little too hard on the government. They do what they can when you’ve lost everything by not taking even more from you. For that, we should be thankful. If you need help with your disaster losses from a qualified disaster area, call Dino Tax Co today at (713) 397-4678 or email davie@dinotaxco.com. The first phone consultation is always free. Also, don’t forget to like us on Facebook at www.facebook.com/dinotaxco.