The tax laws authorize immediate relief for persons whose property is damaged or destroyed by Hurricane Sandy or other natural disasters. But this relief is only for those who suffer serious property damage. What follows are answers to the most-often-asked questions by disaster victims.
Q. Just how harsh are the restrictions on writing off casualty losses? A. Losses (minus insurance reimbursements and $100 for each casualty) are deductible only to the extent that their total amount in any one year surpasses 10 percent of AGI, short for adjusted gross income.
Let's say Andrew and Bonita Crane anticipate that their 2012 return will show an AGI of $100,000; their Hurricane Irene loss is $11,000, after subtracting $100 and any insurance proceeds they recover. With those numbers, no deduction for the first $10,000 (10 percent of $100,000), resulting in a deductible amount of just $1,000. The entire $11,000 will be nondeductible, should AGI surpass $110,000.
Q. What kind of immediate relief is there when natural disasters like Hurricane Sandy damage or destroy property?A. Usually, you can claim casualty losses only on the 1040 form for the year in which they occur. But an alternative becomes available when losses occur in places that President Obama declares disaster areas eligible for federal assistance. The disaster declaration qualifies you for quick tax aid, as well as other types of help.
Your choice is between a deduction for the disaster area loss on the return to be filed for 2012 or the one filed for 2011, whichever is more advantageous. Picking 2011 could mean a quicker refund now, when you need a cash infusion to help pay for property repairs or replacements. If you do so, you must use 2011's AGI in calculating the 10 percent limitation.
An example: Your county is declared a disaster area. Your residence suffers $25,000 in noninsured damage. Your AGI is likely to be $60,000 for 2012 and was $40,000 for 2011. The allowable deduction: 2012's is $18,900 ($25,000 reduced by the $100-per-occurrence rule to $24,900, then reduced by $6,000 or 10 percent of AGI), whereas 2011's is $20,900 ($25,000 reduced by $100 to $24,900, then reduced by $4,000 or 10 percent of AGI).
Q. How do you handle refund claims for disaster losses?A. Use Form 1040X to amend 2011's return without complicated red tape. Just explain the loss and compute the refund due. To speed up processing of the refund, write something like "Hurricane Sandy disaster area claim" at the top of the 1040X.
Take the entire deduction in a single year; splitting the deduction between 2011 and 2012 is a no-no. Approval of a refund claim doesn't preclude a subsequent examination of your return. Hence, amending for any reason may prompt the IRS to question other return items or, worse yet, other returns.
Q. What about help from others?A. Your deductible loss is cut down by cash or property you receive from your employer or from disaster relief agencies specifically for the purpose of restoring your property, but not by cash gifts that aren't so designated. This holds true even though the money goes to pay for the rehabilitation of property. Any food, medical supplies and other forms of subsistence you receive that aren't for replacing property don't reduce your loss, and don't count as taxable income.
Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as: "a leading tax professional" (New York Times; "an accomplished writer on taxes" (Wall Street Journal); and "an authority on tax planning" (Financial Planning Magazine). Information about his books is at julianblocktaxexpert.com.