2018 IRS Casualty Loss Rules for Federal Disaster Areas

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“Out with the old, and in with the new” is a well known quote, first said by Lee Douglas IV.

The IRS Casualty Loss rules that we could use to deduct losses as recently as 12/31/17 are “out” and more restrictive rules are “in”- effective January 1, 2018. This change was part of recent tax reform titled ‘The Tax Cuts and Jobs Act of 2017’.

  • Old rules allowed you to take a Casualty or Theft loss without a presidential Federally declared major disaster
  • New rules only allow a Casualty (not a theft) loss deduction when a presidential Federally major disaster is declared
  • On 8/4/18, The Carr Fire, in Shasta County, CA received this declaration verbally and the declaration was posted on the IRS website on 8/6/18, on the California state specific page

When this occurs, the IRS has special tax law provisions that may help taxpayers and businesses recover financially. Depending on the circumstances, the IRS may grant additional time to file returns and pay taxes. 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. Yes, this means that your 2018 loss could be used to amend your 2017 tax return, or the loss could be used be used on your 2018 tax return. Applying the loss to an amended return, could provide funds to help rebuild now. If you wait, possibilities can be quantified for both years before the decision is made. Affected taxpayers claiming the disaster loss on a 2017 return should put the Disaster Designation, “California, Wildfires and High Winds” at the top of the form so that the IRS can expedite the processing of the refund. With the broad perspective in mind, lets explore beginning details.

Casualty Loss:

A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. It does not include normal wear and tear or progressive deterioration (termite damage). Although only the Carr Fire currently qualifies for this special IRS treatment, a broad definition is provided, because of the possibility of future Presidential Declared Disasters (PDD’s).

Initial Hurdles:

  1. Is your casualty loss in a PDD area?
  2. If so, the deduction is used on Schedule A- Itemized deductions
  3. Is your Itemized Deductions greater than your Standard Deduction?

 

2018 Standard Deduction:

  • Married Filing Joint $24,000
  • Head of Household $18,000
  • Single $12,000
  • Married Filing Separate $12,000
  • Additional small deduction is available for over 65 &/or blind

 

2017 Standard Deduction:

  • Married Filing Joint $12,700
  • Head of Household $ 9.350
  • Single $6,350
  • Married Filing Separate $6,350
  • Additional small deduction is available for over 65 &/or blind

 

Claiming the Loss:

  • Individuals claim their casualty loss as an Itemized Deduction on Form 1040, Schedule A
  • For property held by you for personal use, you must subtract $100 from each casualty event that occurred during the year after you have subtracted any salvage value and any insurance or other reimbursement
  • Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty loss for the year
  • Consider using your 2017 Adjusted Gross Income (AGI) as a benchmark – (the last line, on the 1st page, of your 1040 tax return)
  • Report the loss on Form 4684, Casualties and Thefts
  • Use Section A for personal-use property and Section B for business or income-producing property
  • If personal-use property was damaged or destroyed you may wish to refer to Pub 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
  • For losses involving business-use property, refer to Pub 584-B, Business Casualty, Disaster, and Theft Loss Workbook
  • These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records

 

Initial Action Steps:

  • Inventory your loss by property type- Real Property (real estate); Personal Property (automobiles); Business or Investment property
  • If you own real estate, determine your basis – (cost or adjusted basis)
  • If you need to replace IRS information, use their “Get Transcript” tools, for wage/income information and to obtain previous tax returns
  • State tax rules are different; research yours when you can, to see if tax benefits are available there
  • When you can:
  1. Quantify the value of items lost
  2. Quantify the money received to replace part of your loss
  3. Find your initial IRS loss number: Value of items lost – money received = unreimbursed loss
  4. Use the Unreimbursed loss number to see if the IRS rules, included above, can help you recover, at least some, financially
  5. If you have questions, feel free to contact me via e-mail or by phone; if you use e-mail, please do not send attachments or any personal financial information- that information should always be protected

 

More Information:

Almost two (2) years ago, on 8/23/16, I wrote a blog titled, “Can the IRS help you recover from Mother Nature?” Information about “Net Operating Losses” or “How to Quantify the Loss” can be found there.

In January 2018, I attended an eight (8) hour “Casualty Loss Training” workshop, hosted by the National Association of Tax Professionals. The workshop was created to help Tax Professionals help those affected by Hurricanes Harvey, Irma, and Maria. It may be helpful to know that special legislation was passed to further help those affected by the named hurricanes. The Disaster Tax Relief and Airport and Airway Extension Act of 2017, HR 3823, was signed in to law on September 29, 2017. Perhaps, special rules will be provided to help California recover, faster, with new legislation written just for you.

As I finish writing this blog, the Mendocino Complex fire has just become the largest fire in California history. My heart goes out to all those affected. Although I was born in Michigan, I grew up in Los Gatos, CA and have family residing from one end of the state to the other-literally.  I have family in Redding and in Weaverville, which is why I have followed the Carr Fire so closely; I also have a lot of family/friends in San Diego and others scattered through out the state.

 

Personal Note:

From a heart perspective, I have a sense of what loss and recovery feels like. As a result of the hurricanes last year, I had family/friends living in 5 federal disaster areas: Bexar County (myself in San Antonio); Harris County (my son and others in Houston); and my parents and other family in Florida. During that time, I was posting helpful resources as they became available to me. I will continue to watch the California fires and will share information with you. We might live in separate states, but that just means we are not close neighbors. People as far away as Australia and New Zealand are coming to help you and I want to help you too.

“It always seems impossible until it is done.” – Nelson Mandela

 

Thanks for reading,

Deb

Deborah Ann Fox, CPA helps Individuals and Small Business Owners build and protect their financial wealth. She can help by being your financial compass by providing education and service, while you captain your ship and make the decisions.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

https://www.DeborahFoxCPA.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

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Can the IRS help you recover from Mother Nature?

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Mother Nature created a life changing financial effect upon many American financial lives.

  • Since 6/11/16, there have been 6 Major Disaster Declarations in 6 different states: Texas, Oklahoma, West Virginia, Montana, Wisconsin, and Louisiana
  • During the same period of time, there have been numerous Fire Management Assistance Declarations in multiple states, mostly in California and most recently in Washington

If I could, I would, restore your homes to their original condition- with a wave of a Faerie wand or a twitch of a nose. Unfortunately, I cannot do that.

What I can do is to use my commercial property & casualty experience and my tax knowledge, to create this blog and hopefully provide you information you can use, to help you recover from a financial loss.

Damage caused by Mother Nature = Casualty Loss:

A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. It does not include normal wear and tear or progressive deterioration (termite damage).

  • For those that had a property loss due to fire, an insurance policy may have helped you recover some of your financial loss
  • For those that had a property loss due to a flood, financial help from an insurance company may not be  available; FEMA or others might help

 

In addition to insurance or FEMA assistance, the IRS tax rules may provide you some tax relief:

  1. Allow you to deduct a portion of your unreimbursed loss on your individual tax return
  2. Allow you to use a Net Operating Loss to change past tax returns or to use that loss on a future tax return

 

Perspective:

  • Casualty Losses are required to be reported on Schedule A as an Itemized Deduction
  • For practical purposes, Itemized Deductions need to be greater than the Standard Deduction to provide you a tax financial benefit
  • Is your loss more than the amounts shown below?

 

2016 Standard Deductions:

  • $6,300 for Single and for Married Filing Separate (same as 2015)
  • $12,600 Married Filing Joint (same as 2015)
  • $9,300 Head of Household (was $9,250 for 2015

 

Planning Tip: “Details create the big picture “ – Samuel I. Weill

  • The IRS requires documentation for tax deductions; start to gather and prepare now
  • The only way to see what will work for you is to gather, evaluate and decide
  • If you have questions, reach out and ask, including from me

 

Individual Tax Deduction Rules:

  • Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return
  • You may not deduct casualty and theft losses covered by insurance, unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement

 

If your property is personal-use property or is not completely destroyed, the amount of your casualty loss is the lesser of:

  • The adjusted basis of your property, or
  • The decrease in fair market value of your property as a result of the casualty

 

If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis.

 

Tip: Adjusted Basis =

  • The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation
  • For property you buy, your basis is, generally, the cost to you
  • For property you acquire in some other way, such as inheriting it or getting it as a gift, you must figure your basis in another way- see Pub 551

 

Claiming the Loss:

  • Individuals are required to claim their casualty and theft losses as an Itemized Deduction Form 1040, Schedule A
  • For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you have subtracted any salvage value and any insurance or other reimbursement
  • Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year
  • Consider using your 2015 Adjusted Gross Income (AGI) as a benchmark – (the last line, on the 1st page, of your 1040 tax return)
  • Report casualty and theft losses on Form 4684, Casualties and Thefts
  • Use Section A for personal-use property and Section B for business or income-producing property
  • If personal-use property was damaged, destroyed or stolen, you may wish to refer to Pub 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
  • For losses involving business-use property, refer to Pub 584-B, Business Casualty, Disaster, and Theft Loss Workbook
  • These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records

 

When to Deduct:

  • Casualty losses are generally deductible in the year the casualty occurred
  • However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the casualty loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year
  • Claiming a disaster loss on the prior year’s return may result in a lower tax for that year, often producing a refund – Do the Math

 

When Your Loss Deduction Exceeds Your Income

  • If your loss deduction is more than your income, you may have a Net Operating Loss (NOL)
  • You do not have to be in business to have an NOL from a casualty
  • For more information, refer to Pub 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

 

Net Operating Loss (NOL)– Individuals:

  • Net Operating Losses occur when you have more tax deductions than you have taxable income
  • You may have a NOL if you have a negative number on the line for taxable income before you deduct your personal exemptions- Form 1040, Line 41
  • This can occur in you have a large casualty loss, such as a flood or a fire, and are not reimbursed for the loss from insurance or other possible sources

 

If you have a NOL:

  • Decide whether to carry the NOL back to a past year or to waive the Carry Back period and instead carry the NOL forward to a future year
  • NOL year= This is the year in which the NOL occurred
  • Generally, if you have an NOL for a tax year ending in 2015, you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the Carry Back period), and
  • Then Carry Forward any remaining NOL for up to 20 years after the NOL year (the Carry Forward period)
  • You can, however, choose not to Carry Back an NOL and only Carry it Forward
  • See IRS Publication 536

 

I realize this is a lot of information to take in at one time. Keep it as a guide, and take one step at a time. The following action steps will help you get started.

 

Action Steps:

  • Inventory your loss by property type- real property (real estate); personal property; automobiles; business property
  • If you own real estate, determine your cost basis
  • If you need to replace IRS information, use their “Get Transcript” tools, for wage/income information and to obtain previous tax returns
  • State tax rules are different; research yours when you can, to see if tax benefits are available there
  • When you can:
  1. Quantify the value of items lost
  2. Quantify the money received to replace part of your loss
  3. Find your initial IRS loss number: Value of items lost – money received = unreimbursed loss
  4. Use the Unreimbursed loss number to see if the IRS rules, included above, can help you recover, at least some, financially
  5. If you have questions, feel free to contact me via e-mail or by phone; if you use e-mail, please do not send attachments or any personal financial information- that information should always be protected. General questions and specific numbers are safe.

 

“In times of turbulence and change, it is more true, than ever, that knowledge is power ” – John F Kennedy

“Tax Filing is mandatory; Tax Planning is optional; Tax Planning & Acting can help you keep more $$ in your pocket rather than Theirs (The IRS)” – Deb Fox

It’s impossible said Pride; It’s risky said experience; It’s pointless said reason; Give it a try whispered heart” – anonymous

 

Thanks for reading,

Deb

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA