After Harvey and Irma
Please print and save this alert if you reside or own property battered by Harvey and/or Irma. Pass this along to someone you know who does.
Pretty amazing watching bumper-to-bumper cars evacuating Miami on the Florida Turnpike Friday to see a sole speeding red Range Rover heading in the opposite direction. Yep, Dr. Benjamin Abo, just back home to Gainesville after lending his EMS expertise for seven days in Houston, bolted and drove some four hours away to assist in Miami before they permanently closed access due to Irma. Anyway, worried parents can do little here in New Jersey but pre-occupy themselves in considering clients and friends of the firm who will suffer in the aftermath of Harvey and Irma.
Soooo....as Texas, Florida and other east coast states yet unknown (at least Sunday as of this writing) face a long recovery from the devastating effects of Harvey and Irma, we thought we'd highlight some tax considerations to consider for clients, friends and friends of friends residing or owning property battered by Harvey and Irma.
IRS recently announced "giving some slack".
Victims who are on extension for their 2016 returns, now have until January 31, 2018 to actually file penalty-free. If they have 2017 quarterly estimates due 9/15/17, such are also extended until 1/15/18 (similar to payroll tax and excise tax returns).
If employers permit their employees to forfeit paid vacation, personal or sick days for cash payments the employer makes to qualified charitable organizations assisting victims of Harvey, the workers won't be subject to payroll or income taxes on the value of the donated leave if made before 1/1/19. Just note they are not able to also take charitable deductions on their own income tax returns. The employers can write off the payments to the charities as a business expense. This is all too recent but we suspect the IRS will similarly permit this treatment for Irma victims. Stay tuned.
Victims of Harvey (and probably Irma) are able to access retirement plans more freely as the IRS has temporarily eased the hardship payout rules so victims can tap funds for their living costs arising from the disaster, and plans will be allowed to speed up payment. This will even apply to distributions to plan participants who used the proceeds to help relatives who live or work in the affected counties. Such distributions are still taxable and the 10% penalty for early distributions may apply. Plan loans can also be made on an expedited basis.
How about the tax treatment of a disaster-related personal casualty loss?
If you have a deductible loss due to a disaster in a federally declared disaster area, a special rule allows you to claim your allowable write-off in the year before the year the loss actually occurred and thereby get a tax refund. For example, Hurricane Harvey and Irma victims can choose to deduct their allowable losses in 2016; even though, the damage obviously happened in 2017. This special deduction timing rule allows you to quickly receive some tax-saving relief instead of having to wait until next year when you file your 2017 return. If you've already filed your 2016 return, you must file an amended return to claim your loss in that year.
You must make the choice to take the write-off in the earlier year by no later than the filing deadline (without extensions) of this year's return. For example, victims of Hurricanes Harvey and Irma have until April 15, 2018 to decide.
Watch Out: You Might Have a Taxable Gain!
If you have pertinent property insurance coverage, you actually might have a taxable gain instead of a deductible loss. Why? Because when insurance proceeds exceed the tax basis of a damaged or destroyed asset, you have a taxable profit as far as the IRS is concerned. This is the case even when the insurance doesn't compensate you for the full pre-casualty fair market value of the damaged or destroyed property. These gains are termed involuntary conversion gains.
If you turn out to have an involuntary conversion gain, it must be reported on your tax return unless you: (1) make sufficient expenditures to repair or replace the property and (2) make an election to defer the gain. If you make the election, you'll have a current taxable gain only to the extent insurance proceeds exceed what you spend to repair or replace the affected property.
You can deduct your losses to your home, second home, car or other property that was damaged, at least to the extent insurance does not reimburse you. The loss is equal to the lesser of the property's adjusted basis or decline in value, less any insurance proceeds you got or expect to get. Only taxpayers who itemize their deductions can claim a deduction for damage to nonbusiness property but, unfortunately, for personal losses you first need to reduce the amount by $100 with the balance only deductible to the extent it exceeds 10% of adjusted gross income. The rules for deducting casualty losses on business assets are more liberal.
How about charitable gifts to help out?
Make sure to give to an IRS-recognized charity if you want a proper deduction since there are a good number of bogus charities and solicitors popping up. The IRS is warning taxpayers to be alert to scammers who claim to solicit funds for victims of natural disasters such as Harvey and Irma.
If you're age 70½ or older, consider making the donation from your IRA. You can transfer up to $100,000 annually from your traditional IRA directly to charity. The charitable transfers count as all or part of your required minimum distribution but, unlike other IRA payouts, these direct gifts are not added to your taxable income. Making the tax-free transfer also keeps the money out of your adjusted gross income. That could help you avoid the Medicare high-income surcharge and makes less of your Social Security benefits taxable. You can only make the tax-free transfer from an IRA, not from a 401(k).
Donations you make directly to individuals, no matter how worthy or needy, are not tax-deductible. Such is also the case for contributions or gifts made through personal fund-raising websites that are earmarked for one person or a small group, like a family who lost their home or all of their belongings. While many may not appreciate the difference, you are able to deduct contributions to 501(c)(3) groups that solicit donations on fund-raising sites.
Required Records? What Records?
Reconstructing records after a disaster may be essential for tax purposes, getting federal assistance or insurance reimbursement. Alas, records that you need to prove your loss may have been damaged or destroyed in a casualty.
If you repair damage caused by Harvey or Irma, or spend money for cleaning up, keep the repair bills and any other records of what was done and how much it cost. You cannot deduct these costs, but you can use them as a measure of the decrease in fair market value caused by the casualty if the repairs are actually made, are not excessive, are necessary to bring the property back to its condition before the casualty, take care of the damage only, and do not cause the property to be worth more than before the casualty.
We're not just talking about taxes folks...
The more accurately you estimate your loss, the more aid through loan and/or grant money there may be available to you from FEMA (Federal Emergency Management Agency) or the SBA (Small Business Administration).
So, back to the records...
Believe it or not, the IRS has even made credible suggestions for so dealing with records or lack thereof. The following tips may help to reconstruct your records to prove loss of personal-use or business property:
Personal Residence/Real Property
1. Be sure to take photographs as quickly as possible after the casualty to establish the extent of the damage.
2. Contact the title company, escrow company or bank that handled the purchase to obtain copies of escrow papers. Your real estate broker may also be able to help.
3. Use the current property tax statement for land vs. building ratios, if available; if not available, get copies from the county assessor's office.
4. Check with appraisal companies to locate a library of old multiple listing books. These can be used for "comps" (i.e. comparable sales within the same neighborhood) to establish a basis or fair market value. Looking on line may work too or even using such sites as Zillow.
5. Check with your mortgage company for copies of any appraisals or other information they may have about cost or fair market value.
6. Immediately after the casualty, file Form 4506, Request for Copy of Tax Return, to request copies of the previous four years of income tax returns. Write the appropriate disaster designation, such as "HURRICANE HARVEY" or "HURRICANE IRMA" in red letters across the top of the forms to expedite processing and to waive the normal user fee.
7. Most insurance policies list the value of the building to establish a base figure for replacement value insurance.
8. For property improvements you made, call the contractor(s) to see if records are available. If possible get statements from the contractors verifying their work and cost. Get written accounts from friends and relatives who saw your house before and after any improvements. See if any of them have photos taken at get-togethers. If a home improvement loan was obtained, obtain paperwork from the institution issuing the loan. The amount of the loan may help establish the cost of the improvements.
9. For inherited property, check court records for probate values. If a trust or estate existed, contact the attorney who handled the estate or trust.
10. If no other records are available, check at the county assessor's office for old records about the property. Look for assessed valued and ask for the percentage of assessment to value at the time of purchase. This is a rough guess, but better than no records at all.
1. Kelley's Blue Book, NADA and Edmunds are available on-line and at most libraries. They are good sources for the current fair market value of most vehicles on the road.
2. Call the dealer and ask for a copy of the contract. If not available, give the dealer all the facts and details and ask for a comparable price figure.
3. Use newspaper ads for the period in which the vehicle was purchased to determine cost basis. Use ads for the period when it was destroyed for fair market value. Be sure to keep copies of the ads.
4. If you're still making car making payments, check with your lien holder.
Other Personal Property
1. The number and types of personal property may make it difficult to reconstruct records. One of the best methods is to draw pictures of each room. Draw a floor plan showing where each piece of furniture was placed. Then show pictures of the room looking toward any shelves or tables. These do not have to be professionally drawn, just functional. Take time to draw shelves with memorabilia on them. Do the same with kitchens and bedrooms. Reconstruct what was there, especially furniture that would have held items - drawers, dressers, shelves. Be sure to include garages, attics and basements.
2. Get old catalogs which may be a great way to establish cost basis and fair market value.
3. Check the prices on similar items in your local thrift stores to establish fair market value. Walk through the stores and look at comparable items, especially items such as kitchen gadgets. Look for odds and ends you may have had but forgotten because of infrequent use.
4. Use your local "advertiser" as a source for fair market value. Keep copies of the issues handy and copy pages used for specific items to put with your tax records file on the disaster.
5. Check local newspaper or online want ads for similar items. Again, keep a copy of any you use for comparison with your tax file.
6. If you bought items using a credit card, contact your credit card company.
7. Check with your local library for back issues of newspapers. Most libraries keep old issues on microfilm. The sale sections of these back issues may help establish original costs on items such as appliances.
8. Go to a used bookstore with a tape measure and the diagram of the destroyed property. Measure several rows of used books and count the number of books per shelf. Add up the prices of those books and determine an average cost per shelf. Then count the number of shelves you had in your home and multiply by the average cost per shelf. This will help determine the value of your books before the loss.
1. Inventories - Get copies of invoices from suppliers. Whenever possible, the
invoices should date back at least one calendar year.
2. Income - Get copies of bank statements. The deposits should closely reflect what the sales were for any given time period
3. Obtain copies of last year's federal, state and local tax returns including
sales tax reports, payroll tax returns and business licenses (from city or
county). These will reflect gross sales for a given time period.
4. Furniture and fixtures - Sketch an outline of the inside and outside of the
business location. Then start to fill in the details of the sketches. (Inside the
building - what equipment was where; if a store, where were the
products/inventory located. Outside the building - shrubs, parking, signs,
5. If you purchased an existing business, go back to the broker for a copy of
the purchase agreement. This should detail what was acquired.
6. If the building was constructed for you, contact the contractor for building
plans or the county/city planning commissions for copies of any plans.
I had to move. Now what?
Taxpayers should use their current address when filing any returns. If you move after filing a return, you should update your address with the IRS by calling the IRS Disaster Assistance Hotline at (866) 562-5227, or by filing Form 8822, Change of Address. The IRS also recommends that taxpayers notify the Post Office serving the old address.
What about reimbursements from state funds to compensate for property damage that are received in a subsequent year?
If you properly claimed a casualty loss deduction and in a later year receive reimbursement for the loss, you need to report the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced your income tax in the year in which you reported the casualty loss deduction (remember you could have taken it in 2017 or even 2016). If the subsequent year reimbursement exceeds the amount of the casualty loss deduction, you reduce basis in the property by the amount of such excess. In addition, you include such excess in income as gain to the extent it exceeds the remaining basis in the property, unless such gain can be excluded from income or its recognition can be deferred.
If your employer has to relocate to another location because of Harvey or Irma, what travel costs can I now deduct?
The answer will depend on whether the employer move is realistically expected to be for less than or more than one year. A temporary assignment away from home, an assignment whose termination can be foreseen within a fixed and reasonably short period (less than one year), does not shift the "tax home." Therefore, you, as the employee, may deduct the necessary traveling expenses in getting to your temporary assignment and also for the return trip to your tax home after the temporary assignment is completed, and your expenses for lodging and 50% of the cost of the meals while you are in the place to which you are temporarily assigned. Unfortunately, an employee is not treated as being temporarily away from home if your period of employment exceeds one year. The one-year rule generally isn't triggered by short intermittent assignments that span more than one year and employment away from home at a single location for a period of less than a year is treated as temporary, in the absence of facts and circumstances indicating otherwise. If employment away from home is a single location initially is realistically expected to last for one year or less, but later is realistically expected to exceed one year, then the employment will be treated as temporary until the date that your realistic expectation changes (at which point the employment will no longer be "temporary"). Clear as mud, eh?
Can you claim travel expense deductions if you are displaced by Harvey or Irma and must live and work in another locality?
The tax law generally allows business expense deductions for ordinary and necessary traveling expenses (including meals and lodging) incurred while away from home in pursuit of a trade or business. For this purpose, your "home" is generally the vicinity of your principal place of business, as determined by all the facts and circumstances. However, if you realistically expect to work in a single location for more than one year (or there is no realistic expectation that the employment in the single location will last for one year or less), that location must be treated as the tax home (regardless of whether employment actually exceeds a year). Thus, if you, as the displaced taxpayer, live and work in another locality, but realistically expect to return to live and work in the affected area within one year, you may be considered to be traveling away from home in pursuit of a trade or business. If you are displaced and work in more than one locality, however, the facts and circumstances must be taken into account to determine which locality is your "tax home".
Taxability of qualified disaster relief payments?
Qualified disaster relief payments are excludable from your income. There is no resulting increase in the basis or adjusted basis of the property for which the payments are made. Also, you cannot take a deduction or credit due to an expenditure for which exclusion for a payment is granted. The exclusion does not apply to amounts received for the sale or disposition of property. Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. In calculating your casualty loss. If the payment is for replacement of lost or destroyed property, then you would subtract the amount in figuring your casualty loss. Generally, FEMA "Individuals and Households Program" payments are excluded from gross income if they are not compensated for by insurance or otherwise.
When you receive this email alert, we hope and pray the rebuilding comes swift and the pain was kept to the absolute minimum.
We believe our truly dedicated first responders can literally "WALK ON WATER".