I’ve never been personally affected by a natural disaster, so I can only imagine what survivors go through. Reading friends’ Facebook updates on flooding are stressful enough. And while the devastation is heartbreaking, people pull together to help each other and show the good side of humanity.
There can also be some good that comes out of disaster. In the case of the Titanic, laws and safety standards improved. I’d like to think the government and cities are more prepared for the next time. Personally, I met my husband because of the tsunami that hit southeast Asia in 2004. We were both on the planning committee for a fundraiser at Saint Louis University. Part of the fundraiser included selling the buttons pictured above.
So a heartfelt hug to those impacted by the recent hurricanes. And a huge “thank you” to the rescue and relief workers.
So what does this have to do with taxes?
While taxes are inevitable, the IRS does offer some relief for those impacted by natural disasters. First, impacted individuals and business are granted an extension of time to file certain tax returns and make certain tax payments. In the case of Hurricane Harvey, individuals who have returns on valid extensions due October 16, 2017, and businesses whose returns are on valid extensions and are due September 15, 2017, have until January 31, 2018, to file. (IR-2017-135)
Second, Q3 2017 estimated tax payments are due September 15, 2017 and Q4 2017 estimated payments are due January 16, 2018. In both cases, affected taxpayers have until January 31, 2018 to make estimated tax payments. However, taxpayers whose 2016 individual returns were on extension are not eligible for relief from paying any 2016 income tax because those payments were due April 18, 2017.
Additionally, special casualty loss rules apply in a federally declared disaster area. If you have a deductible casualty loss (more on that below), you can amend your previous year’s tax return to report current losses. Meaning…you get a quick refund (generally within 45 days) of taxes you’ve already paid instead of waiting to report the losses on your current year’s tax return.
Using Harvey as an example, casualty losses happened during 2017. Affected taxpayers can amend their 2016 tax return to receive a refund during 2017 instead of waiting to file their 2017 taxes in 2018.
Who is eligible for relief?
In the wake of Hurricane Harvey, individual taxpayers in the following Texas counties are currently eligible for relief: Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria, and Wharton. Taxpayers in other areas that are added to this list by FEMA will automatically qualify for this relief.
With Hurricane Irma barreling through the Caribbean and on its way to southern Florida, I’m sure there will be similar reliefs available for taxpayers when it does hit the US.
There are other things to keep in mind when disaster strikes:
Take care of yourself first
Natural disasters are stressful and can be traumatic, so take care of your emotional health and physical well-being first. If you have kids, the Red Cross also offers a guide about helping them cope.
Disasters lead to casualty losses…but you might also have a gain
Casualty losses result from damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. These include natural disasters: wildfires, hurricanes, earthquakes, and tornadoes. Or there are “human” events like car accidents, identity theft, vandalism, and document fraud.
The most important consideration in determining a casualty loss is knowing the basis in your property. How much did you pay for the property and what adjustments to its value (i.e. depreciation, improvements, or appreciation) have been made over time? A personal casualty loss is the smaller of the adjusted basis in the property or the decrease in the value of the property after the disaster. The loss is reduced by the amount of insurance the taxpayer expects to receive and other proceeds (like FEMA payments) which may convert the loss into a gain. So make sure to get a copy of the insurance adjuster’s reports!
In general, casualty losses are deductible
In general, personal casualty losses are deductible on Schedule A if, in one year, they total more than $100 and more than 10 percent of your adjusted gross income. Keep in mind, losses covered by insurance or other assistance are not deductible.
Keep documentation to prove that a loss took place due to a specific disaster: receipts, credit card statements, those insurance adjuster’s reports, photos, and appraisals. Additional costs for documenting your loss, like appraisals, may also be tax deductible.
With that in mind, file insurance claims quickly
First, compile a list of lost, damaged, or destroy property. Then file an insurance claim as soon as possible because insurance claims are usually settled in the order received. Though in comes cases, the most severe insurance claims may receive the highest priority.
Save receipts for any additional living expenses incurred while displaced from your home. Same for any materials purchased for repairs that were reasonable and necessary, like covering a hole in your roof. Be sure to have an insurance adjuster review the damage to your home and property before making major repairs and throwing out damaged furniture or high cost items.
Manage Your Cash Flow and Debt
It can take some time to receive disaster relief funds or process insurance claims and receive payment. So I always recommend having an ample emergency fund. I tell my clients to keep at least 3 to 6 months of living expenses in the bank. If you have variable income, that might be closer to 12 months of business and living expenses. Of course any savings is better than nothing.
Fortunately, disaster relief offered by federal, state, and local governments are generally income-tax free.
Contact your employer if you can’t get to work. They might offer some flexibility or other benefits. If the business was destroyed, will you still receive a paycheck? Can you use paid vacation and/or sick days while getting your life back in order? If you become injured or disabled, can you claim short- or long-term disability insurance?
While it might be helpful in the short-term, evaluate any tax or long-term consequences of cashing out an insurance policy, tapping into a retirement, or taking out a 401(k) loan. Talk with your CPA or financial advisor.
Be careful with credit cards because interest can accrue quickly.
Watch out for fraud
Finally, disasters can also bring out some unsavory individuals. They’re looking to make a quick buck be defrauding victims of disasters. So do your research, conduct background checks, and be cautious when wiring money.
For those assisting disaster victims
If you itemize your deductions, save your receipts for any cash and noncash donations made to a qualified organization. And keep track of any travel expenses when doing volunteer work for qualified charities (provided the trip is focused on volunteering).
