The income tax laws include a number of breaks to help victims of disasters, such as Hurricane Sandy.
The IRS issued a reminder that, since Hurricane Sandy is designated as a qualified disaster for federal tax purposes, qualified disaster relief payments made to individuals by their employers or any other person are excluded from taxable income. Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. Payments to repair or rehabilitate personal residences or to repair or replace the contents to the extent not covered by insurance also qualify.
Employer-sponsored private foundations may also provide disaster relief to employee victims without affecting their tax-exempt status.
(IR-2012-84, November 2, 2012.)
The IRS also announced the postponement of various filing and payment deadlines for affected taxpayers in certain counties in Connecticut (starting October 27), New Jersey (starting October 26) and New York (starting October 27).
Tax returns and payments due for payroll and excise taxes and fourth quarter estimated tax payments due on or after the above dates may be paid without interest and late payment or late filing penalties provided they are paid by Febuary 1, 2013.
The IRS is waiving failure to deposit penalties for federal payroll and excise tax deposits normally due from the above start dates and before November 26, provided the deposits are made by November 26.
(IR-2012-83, November 2, 2012.)
The main item for which a tax deduction is available is the casualty loss for destruction of a residence and furnishings. The loss is the lesser of (1) the tax basis (cost to compute gain or loss on your income tax return) of the residence or furnishings or (2) the excess of the fair market value before the casualty over the fair market value after the casualty.
The loss is reported using federal Form 4684. You can get a copy of the form and instructions at www.irs.gov.
$100 plus 10% of adjusted gross income is subtracted from the casualty loss to determine the deductible amount. The loss is an itemized deduction reported on Schedule A.
A special election is available for losses in a federally-declared disaster like Hurricane Sandy. The taxpayer may elect to deduct the loss on an amended income tax return for the year before the loss, or on the tax return for the year of the loss. For example, Hurricane Sandy victims can elect to amend their 2011 income tax returns now to claim a tax benefit from the 2012 disaster loss and get a federal tax refund sooner than if they wait to deduct the loss on their 2012 income tax returns. The problem is they need to know what they will receive from their insurance and any relief recovery to compute the loss, and might not have that information for some time.
In order to prepare an amended income tax return, you will need a copy of the federal income tax return for 2011. If you lost it and you used a tax return preparer, first try to get a copy from your tax return preparer. Otherwise, you can request a copy of the federal income tax return using Form 4506. The IRS should waive the $57 fee if you write “Hurricane Sandy” on the top of the form.
If you have a gain because the amount recovered for your loss exceeds the tax basis of the property, there is an election available under Internal Revenue Code Section 1033 to defer the taxation of the gain provided you use the proceeds to replace the destroyed or damaged property within two years after the end of the year in which the gain is realized. Consider getting professional help with this election.
Congress may yet pass additional relief measures as they did after Hurricane Katrina. We won’t find out until after the election, when a lame duck Congress reconvenes.
For additional information, see IRS Publication 547, Casualties, Disasters and Thefts at the IRS web site, www.irs.gov. There are also additional information postings by the IRS at the site.
For more details about the areas warranting public or individual asstantce, visit the Federal Emergency Managment Agency (FEMA) web site, www.fema.gov/news/disasters.fema.