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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Financial Fitness: Improving your Tax Story

2013 Tax

Our tax returns tell a story.

A Tax Return is the Story of your recent Past; it is your 2015 financial story.

The story tells the reader lots of information about you:

  • Marital Status (tax rate) Single; Head of Household; Married filing Separate; Married filing Joint; Widowed
  • How you earn your money – employee, self-employed, real-estate investments/rents; royalties
  • How you support yourself if you are not working – unemployment, retired, pension, social security, Required Minimum Distributions
  • How you spent your money: mortgage interest; children; student loans; medical bills; charitable donations
  • Did you have a good year with gambling winnings? Capital Gains?
  • Did you have financially devastating year, as many unfortunately did this year, because of so many natural U.S. catastrophes in 2015?

 

Income Tax Planning is one of the best ways to build your financial wealth.

2015:

Yes, 2015 is over and there is limited opportunity to improve that tax bill. However, depending on your circumstances, there might still be a way to reduce the amount you pay.

  • Contribute to your IRA before 4/18/16
  • If you are married, can you start and fund a Spousal IRA?
  • For 2015 and 2016, your total contributions to all of your traditional and Roth IRAs cannot be more than:

$5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit

Your Traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

 

Be Careful of Excess IRA Contributions:

If you exceed the 2015 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account

Note that Employer contributions made under a SEP (Simplified Employee Pension) plan do not affect the amount you can contribute to an IRA on your own behalf.  You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA.

2016:

Our Financial Life is not stagnant. Like the ocean or a river, it changes all the time – it is a continuous evolving, moving, financial puzzle. New life stages & events provide us an opportunity to make new financial decisions & implement a revised plan.

The key to changing your Tax Story requires you to take action, now, in the present, and in the future.

Here are some tips to help you strengthen your Financial Fitness in this New Year:

  1. If you are an employee, review your withholding allowance on Form W-4. Is it accurate for what you anticipate in 2016? If not adjust, as soon as possible. The earlier you do this during the year, the more accurate your withholding will be.
  1. If you are Self-Employed, even part-time, do you know if you are required to make estimated quarterly payments to the IRS?  Avoid penalties & interest by ensuring that you make the required payments if they apply. Independent Contractors, Freelance workers, those that conduct Internet based sales (Etsy, eBay, Airbnb) and even Uber Drivers should review the information on the IRS website.

The IRS expects you to pay tax as the money is earned. If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year.

  1. If you have a High Deductible Health Insurance Plan, consider setting up a Health Savings Account (HSA). This is a tax- advantaged account to help pay for your medical expenses.

It is also an “Above the Line” deduction on your 1040 Individual tax return, which means you can use it to reduce your income, even if you do not itemize. Lower income, generally indicates, lower taxes.

  1. If you gamble, including playing the lottery, save all of your 2016 “expense” receipts. Why? If you win big, you can reduce the amount you won by the amount that you lost and only pay tax on the difference.

Gambling income includes but is not limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.

To deduct your losses, you must be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses

  1. Defer at least some of your income through a 401K match or similar program to reduce your taxable income for the year & to build savings for the future.
  1. If you itemize or might be able to itemize, record all of the miles you drive, by category: Charity ($0.14); Medical/Moving ($0.19) and Business ($0.54).

It can all add up, faster than you might think and may also make the difference between claiming the standard deduction and being able to itemize. The more you can legally write off, the lower your tax bill.

You can keep a paper calendar in your car & record what, where, why, & how many miles for each trip or use a Smart Phone App to help you.

Whatever you do, ensure you keep good records. If you are audited & can’t prove the deduction, the deduction can be denied and you could owe a penalty and interest for the underpayment.

  1. If you have a business and operate on a cash basis, it is imperative that you keep great records for both cash coming in & cash going out. This recent article highlights the reason why you need to do this: http://smallbiztrends.com/2015/12/recent-irs-case-highlights-need-sophisticated-small-business-management.html

 

  1. Think like a Tax Professional: Know your “Income” Types & their Tax Rates:

Taxable “Income”:

  • Ordinary Income is income earned from providing services or the sales of goods
  • Capital gains are usually associated with the sale or exchange of property characterized as capital assets
  • Short Term Capital Gains are taxed at your Ordinary Income tax rate (10 % to 39.6%)
  • Long Term Capital-Gains tax rates vary by your income tax bracket and the type asset sold
  • Generally, if you’re in the 10% or 15% tax bracket, you’ll pay 0% on those gains. Most other taxpayers pay 15%; however, the rate can also be 20, 25, or 28% for certain asset classes and/or income levels.

Tax Deferred Investment Income includes:

Withdrawals from Traditional IRAs and your 401K, which are, taxed as ordinary income (10% to 39.6%)

Tax Free Investment Income: Roth IRA

  • Tax Free Income as long as the account has been open for at least 5 years
  • Provides flexibility in the timing of future income – you decide
  • Required Minimum Distributions do not apply to Roth accounts as are required by Traditional IRA plans
  • Roth IRA distributions are not considered as income when determining how your Social Security payments are taxed. Qualified Roth distributions are not included in either net investment income or in the modified adjusted gross income calculation for assessing the 3.8% net investment income tax

 

  1. Manage your Tax Bracket:
  • Try to keep your Ordinary Income in the lower tax brackets
  • “Fill up” each bracket, where possible
  • Be aware of tax consequences before making decisions that push you into the next highest rate bracket; i.e. can you defer a bonus or sale to new year if it means you will be taxed 10% less?
  • If you itemize, group deductions where possible; i.e. elective medical or dental procedures; charitable contributions to reduce your taxable income – Plan

 

  1. Your income tax bill is perhaps the biggest bill you will pay over your lifetime. Learn, Plan, Act to reduce and keep more of your money in your pocket, not Theirs (The IRS).

Yes,  to be in compliance, we need to file & pay.  The IRS rules are there for us to use. It is our responsibility and our choice to use them or not. The IRS is not going to tell you, you could have paid less, if you had just (xxx). There are a lot of possible ways to “fill in the blank”. Each Tax Story is unique.

As a CPA – Tax Advisor, I love learning the rules and then sharing information to help other people reduce their tax bills. It is my way to help empower other people and hopefully, make a small difference in their quality of life. Nobody likes paying taxes; almost all of us like to save money.

Have fun leaning, planning, and saving.

Cheers to a happier, healthier, & wealthier 2016!

Thanks for reading,

Deb

 

 

Deborah Ann Fox, CPA is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointments. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com

How much do you keep of what you earn? 2013 Tax Plan

Have you noticed “The IRS” spells “Theirs”?  Paying tax is required.  How much you pay is determined, in part, by how you plan.

If you are married, or plan to be, for the 2013 Federal tax year, now is the time to look at your potential tax liability and determine your financial plan. Nobody wants to find out at the end of year that they owe taxes when there is little time to do anything about it.

The U.S. uses a graduated tax rate, which means that the tax rate increases as the income goes up.

There are five filing statuses:

  • Single (S)
  • Married Filing Joint (MFJ)
  • Married Filing Separate (MFS)
  • Head of Household (HOH)
  • Qualifying Widow (er) with Dependent Child (Q/W)

More than one filing status can apply to you. You can choose the one that gives you the lowest combined tax.

Generally, Married Filing Joint will result in the lowest amount of tax. There are exceptions and good tax planning involves reviewing “what if” scenarios.

Are you “withholding” enough to cover the estimated tax liability by the end of the year? If not, you need to either increase your withholding or use other methods, such as deferring income, to decrease the estimated amount owed.

The following will help you get started:

Filing Single is the easiest. All you need to decide is if you are going to save more money by using the Standard Deduction or to itemize deductions.

Married Filing Joint (MFJ) can be used if:

You are married on the last day of the year

Both you and your spouse report all your income, exemptions, deductions, and payments

Both spouses must sign the tax return because both of you may be held responsible for accurate reporting and tax payment

Married Filing Separate

Report your income, exemptions, credits, and deductions

Different rules apply if you live in a community property state. See Publication 555

You will “generally” pay more combined tax on Married Filing Separate returns than you would on Married Filing Joint returns for the reasons listed under “Special Rules” in IRS Publication 501

Some of the “Special Rules” include:

If your spouse itemizes deductions, generally, you cannot take the standard deduction

You cannot take the student loan interest deduction, the tuition and fees deduction, the education credits, or the earned income credit.

There are reasons why you might want to choose the Married Filing Separate (MFS) status:

  • You only want to be responsible for the accuracy and the payment of your tax liability
  • If your Adjusted Gross Income  (AGI) is lower by filing MFS than MFJ you may be able to deduct a larger amount for certain deductions that are limited by AGI such as medical expenses. For the 2012 tax year, you can deduct only the part of your medical and dental expenses that exceeds 7.5% of your Adjusted Gross Income. This increased to 10% for 2013.
  • Head of Household is for unmarried, or are considered unmarried, you provide a home for certain persons, and you meet the criteria by passing one of two tests. Detailed information can be found at IRS.Gov.

Tax rules are complicated and this is by no means comprehensive. Hopefully, it is enough to encourage you to look at your tax situation and to take action so you are not surprised with a big tax bill next year. A large return because of overpayment equates to giving the IRS an “interest free loan”.

Suggestions:

Use the 2012 tax rules to estimate your 2013 income and the amount of federal tax withheld

If it appears that you will either owe or have a possible large refund, consider filing a new W-4, the Employee withholding Allowance Certificate, with your employer

Reasons to change the amount withheld may include a change in your marital status or your dependents. Perhaps, you bought a house this year and know you will have enough deductions to itemize rather than use the standard deduction. Maybe, because of multiple jobs, too much is being withheld from your checks.

You work hard for your money. Don’t you want to keep as much as you can? After all, it is yours, not all theirs.

Together in Love & Marriage – but not for U.S. Taxes?

Marriage and TaxesNote:

While today’s blog has an initial focus for those affected by the recent Supreme Courts DOMA decision, the tax implications discussed apply to all married couples that file their federal return as Married Filing Joint.

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Same-Sex Married Couples may have enjoyed life together for years, but 2013 will be the first U.S. tax year that these couples have to consider “filing married “. How will this affect their personal finances or even the their personal financial liability?

Perhaps, because filing married was never a possibility for filing Federal Taxes there was not a clear and driving need for discussion. Now there is.

Consider this quote from the Prudential LGBT Financial Experience 2012-2013 Research Study: “Same-Sex Couples value financial independence far more than the general population, often keeping separate accounts and financial plans.”

With the overturn of certain parts of DOMA (Defense of Marriage Act), it will be harder to keep money in the closet.

One of my personal goals is to help people make smart financial decisions and to avoid expensive mistakes. A good method for doing this is to look at both the risks and the rewards of each possible action.

This blog will focus on some of the risks for “filing married”. In my next blog, I will discuss the difference between Married Filing Joint (MFJ) and Married Filing Separate (MFS).

Married Filing Joint (MFJ) requires that both spouses sign the tax return. Note that doing so can result in the following as per the 2012 1040 U.S. Individual Tax Return Instructions:

Joint and several tax liability. If you file a joint return, both you and your spouse are generally responsible for the tax and interest or penalties due on the return. This means that if one spouse does not pay the tax due, the other may have to. Or, if one spouse does not report the correct tax, both spouses may be responsible for any additional taxes assessed by the IRS.

You may want to file separately if:

You believe your spouse is not reporting all of his or her income, or

You do not want to be responsible for any taxes due if your spouse does not have enough tax withheld or does not pay enough estimated tax.

Relief from joint responsibility:  In some cases, one spouse may be relieved of joint responsibility for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. You can ask for relief no matter how small the liability.

There are three types of relief available:

Innocent spouse relief

Separation of liability (available only to joint filers who are divorced, widowed, legally separated, or who have not lived together for the 12 months ending on the date the election for this relief is filed).

Equitable relief

You must file Form 8857, Request for Innocent Spouse Relief, to request relief from joint responsibility. Publication 971, Innocent Spouse Relief, explains the kinds of relief and who may qualify for them.

On August 8, 2013, The IRS issued REG-132251-11. This proposes to expand from two to 10 years the amount of time that taxpayers could apply for Innocent Spouse Relief so they are no longer responsible for the tax debts of estranged spouses.

In closing, I understand that the “Joint & Several Liability” may come as a surprise to many and it should. Many are newly married for U.S. tax purposes. I chose to share the “risks” first because it will help keep the “rewards” in perspective.

To Plan – It Helps to Understand – Financially

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“Remember, a dollar saved is a dollar you do not need to earn” – Deb Fox

One of my goals is to make the seemingly complex, simple.  With that in mind, I offer you an IRS Federal Tax primer.

To plan, financially, it helps to understand that not all numbers are created equal. Some numbers provide more benefit than others.

My hope is that this primer will serve as a good tool to refer back to when I write about other tax topics.

The Visual:

Income
– Above the Line Deductions
= Adjusted Gross Income
– Standard Deduction or Itemized Deductions
Exemptions
= Taxable Income
– Tax Credits
Tax Paid
= Tax Owed or Refunded

The Narrative:

Income includes all income except income that is exempt by law

Deductions reduce your tax liability by reducing the amount of income that is taxable

Income minus Above the Line deductions equals Adjusted Gross Income (AGI)

  • Above the Line deductions include, in part, monies paid for:
  1. Health Savings Account
  2. IRA Deduction
  3. Qualified Student Loan Interest
  4. Self-employed health insurance or qualified pension plans

Adjusted Gross Income minus either the Standard Deduction or Itemized Deductions

  • Use the highest number
  • The 2012 Federal Standard Deduction for Single of Married Filing Separate was $5950; $11,900 for Married Filing Joint or Qualified Widower; $8,700 for Head of Household

Then subtract $3,800 for each 2012 qualified Exemption = Taxable Income

  • Exemptions include you, your spouse, & qualified dependents

Taxable Income minus Allowable Credits

  • Credits are either Refundable or Non-Refundable
  • Refundable means you can reduce your tax liability below zero – IRS pays you
  • Non-Refundable means you can reduce your tax liability to zero

Refundable Credits Include:

  • Earned Income credit
  • Child Tax credit
  • The American Opportunity Tax credit

Non-Refundable Credits include:

  • Adoption credit
  • Retirement Savings Contributions Credit (Saver’s Credit)
  • Lifetime Learning credit

Takeaways:

  • Above the Line deductions are more valuable than Below the Line deductions because they are available to all taxpayers and are not subject to income limitation phase-outs
  • Deductions reduce the amount of income subject to tax
  • Tax credits reduce the amount of tax you pay
  • Tax planning can help you reduce your tax liability and keep more of your money
  • Remember, a dollar saved is a dollar you do not need to earn.

Keep marching toward Financial Freedom. Happy Planning!