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

Financial Health: 8 Ways to Check

8 Ways to Check and/or Protect your Financial Health

Many of us see the doctor for an annual check-up.

Probably, even more of us have our car checked on a routine basis.

Few of us take a holistic view of our financial health, particularly, on a routine basis.

I encourage you to be an early adopter, change this, and become proactive with your financial health.

For our physical health, our doctor might check our weight, blood pressure/pulse, LDL/HDL and then compares the findings to our initial baseline results.

For our financial health, we should also establish a baseline /benchmark and then, periodically compare our results to our previous records,

How are we going to know how we are doing unless we take the time to look?

How are we going to tell if we are getting better if we don’t have an initial baseline to compare to?

The factors that you choose to use are up to you. My list includes possibilities for you to consider. Record your answers & date it. Some responses will result in a number, others will be a yes/no and perhaps initiate a new thought process. Here are my suggestions: 

  1. Determine your Personal Net Worth
  • Create a Balance Sheet: Assets = Liabilities & Equity
  • Assets are the value of what you own; liabilities are what you owe
  • Assets – Liabilities = Equity in a business or your personal Net Worth
  1. Review the Liability limits on your insurance policies (Homeowners, Renters, Auto, Business). Is the limit high enough to protect your Net Worth if something serious happened? You don’t want to leave your “assets” (money) exposed to risk of loss without making the conscious decision to do so.
  1. Cash Flow- Positive or Negative?
  • Money coming in, money going out, and when?
  • Is it steady through out the year or does it fluctuate?
  • Are you spending more than you bring in?
  1. Liquidity – Emergency Fund +
  • Emergency Fund savings for 3-6 months of living expenses?
  • Any other “reserves” you keep – Christmas or vacation fund?
  1. Your Personal Savings rate
  • Do you try to pay yourself first?
  • Are “you” built into your required monthly expenses?
  • Do you fully participate in your company’s matching program?
  1. Determine your Debt/Income Ratio
  • Lenders use this to determine your ability to manage payments
  • Total monthly debt payment/monthly gross income
  • 43% is generally the maximum for a Qualified Mortgage as per Consumer Finance
  1. Review your Retirement Allocations
  • Does it make sense?
  • Is it balanced?
  • Are you earning a return? 
  1. Check your credit score – It is your Financial Reputation
  • Obtain your free annual credit report from each of the 3 major reporting agencies, check it for accuracy, and dispute anything that is not correct
  • Obtain your FICO score

Taking the time to manage our money provides benefits:

  • Feeling in control
  • Knowing our capacity to absorb financial shocks
  • Finding if we are on track to meet our financial goals or
  • Having peace of mind and the flexibility to make choices

The road to financial freedom is full of potholes. If you take the time to discover, find, and fix them, your trip will be less eventful and you will reach your destination faster & safer.

May you have a safe, prosperous, and fulfilling journey.

Thanks for the reading!

Deb

P.S. I welcome and encourage comments and questions. It is one way to see how I am doing. 

Deborah Ann Fox, CPA is working to make a difference in peoples lives by helping them build and protect their financial health. She offers free 30 minute, no obligation consultations and is available for appointments – including remote. More information is available at http://www.DeborahFoxCPA.com. Questions or comments can be sent to debfoxfinancial@gmail.com.

Milestones & Mountains – the LGBT “Financial Playing” Field

In Honor of the 40th anniversary of the San Diego Pride Festival this weekend, I offer an update about “Financial Equality” for the LGBT community, with whom I celebrate the financial victories that have been achieved since we celebrated this festival last year. 

Last year, we had 2 huge U.S. Supreme Court 6/26/13 decisions to celebrate:

  1. The Defense of Marriage Act (DOMA), section 3, was declared unconstitutional
  2. Proposition 8 defenders lacked “standing” which cleared the way for Legal Gay Marriage in CA

We also celebrated because Same-Sex Marriages (SSM) had just been allowed to resume again after a long break between 11/5/2008 through 6/27/2013.

This year, we have many reasons to celebrate, let’s call them “milestones achieved”.

We still have some mountains left to climb before the SSM “playing field” matches the “playing field “ of married opposite-sex couples.

Perspective:

The right to SSM is important for many reasons. For example, Wells Fargo issued a study in June 2014, in which the top 3 rights and benefits were listed for those surveyed:

  • Healthcare decision making rights 61%
  • Insurance and healthcare coverage 58%
  • Inheritance rights 56%

Health care decision-making can affect the quality of life. Insurance, healthcare coverage, and inheritance rights, all have a significant effect on the “financial equality” of life.

These rights and many others are becoming available to those that can legally marry their same-sex partner.  T

Today, SSM rights and benefits look more like a patch-work quilt across the United States as compared to those enjoyed by opposite –sex married couples who begin to enjoy their benefits, often as soon as they say, “I do”.

There has been tremendous progress and numerous changes since we celebrated San Diego Pride last year. Milestones to celebrate now include:

Same-Sex Marriage is fast becoming a reality for more people:

  • 19 states & the District of Columbia have Legal Same-Sex Marriage and 31 states have Same-Sex Marriage Bans
  • 12 states have had gay marriage bans overturned and appeals are in progress
  • 8/29/13 All Legal Same- Sex Marriages will be recognized for federal tax purposes as per the U.S. Department of Treasury
  • 9/16/13 effective date for Revenue Ruling 2013-17 which reads: “that for federal tax purposes, the Service adopts a general rule recognizing a marriage for same-sex individuals that was validly entered into a in a state whose laws authorize the marriage of two individuals of the same-sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.”
  1. This opened the door to file original returns, amended returns, and claims for credit or refund for any overpayment of tax, provided that the applicable limitations period was still open under section 6511
  2. Couples can “pick and chose”, by year, which return, if any, they chose to amend, as long as the window is still open. Big return? Amend. Owe? Skip it.
  3. The window to amend the 2010 return, generally, expired on 4/15/14
  4. The 2011 1040 return can be amended until 4/15/15
  5. The 2012 1040 return can be amended until 4/15/16

Earlier this week, I attended an IRS DOMA seminar, which was introduced to about 300 tax professionals as “DOMA is about money, it has nothing to do with sex”.

SSM, is partially about money. The Windsor  (DOMA) case was about inheritance rights between spouses.

  • Federal tax law allows a deceased spouse to leave their assets, including a home, to the other spouse, without incurring estate tax. The Estate Tax Rate is 40%.
  •  The DOMA ruling resulted in Windsor being owed an IRS refund of $363,053 for the estate tax she had paid

The Estate Tax is a tax on your right to transfer property at your death.

  • Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse. This election is made on a timely filed estate tax return for the decedent with a surviving spouse
  • 6/20/14, the Social Security Administration issued guidelines on eligibility for spouse-based retirement and survivor benefits, Medicare, and SSI benefits
  • 7/16/2014, the Connecticut Supreme Court rules that a Lesbian Widow has legal rights that predate Marriage Equality in the state.

Mountains:

  • SSM couples are unable to receive Social Security Spousal Benefits if they were married in one of the states that allow same-sex marriage but live in a restrictive state (reference Bankrate Retirement Blog 7/1/14)
  • Veterans benefits also are restricted for those living in states that do not allow same sex marriage (same reference as above)
  • The right to inherit pension benefits could fall under the “it depends” category. A recent 6/2/14 article about the Bayer Corporation provides some insight
  • Family Medical Leave Act does not cover same-sex spouses. Some employers grant this right to their employees and kudos to them.
  • Nationwide, there is not a federal law against LGBT workplace discrimination. A bill to accomplish that goal, the Employment Non-Discrimination Act, passed the Senate last year but has not yet been taken up by the House

In closing, as an American, I believe that all American’s should have the same rights and protections, under federal law.  The financial “playing field” should be the same regardless of whom you love and where you live in the United States.

Discrimination should be something all citizens do not have to fear or endure.

My name is Deb Fox and I am the proud sister of two gay brothers and multiple LGBT friends. I am an advocate and an ally. I believe in equality and am trying to do my part to make a difference, here now, today, and tomorrow.

Deb Fox is working to make a difference in peoples lives, hearts, and wallets. Although she earned her CPA in 1997, she is not currently practicing as a CPA. She does use her knowledge to help others protect their financial health and is available for side-by-side, remote, or mobile appointments.