The ongoing 2017 Atlantic hurricane season has been one of the most destructive and devastating storm seasons we’ve ever seen. The three strongest storms-Irma, Harvey and Maria-have claimed hundreds of lives and led to tens of billions of dollars in damages.
Our hearts go out to all those impacted by the storms. As we all struggle to rebuild businesses and communities, it is important to keep in mind that storm victims may be able to recoup some of their losses through tax savings. The recently enacted “Disaster Tax Relief and Airport and Airway Extension Act of 2017” expands the relief provisions.
The IRS is offering tax relief to victims of each of this year’s three major storms by extending various individual and tax return deadlines. For taxpayers in Florida, Texas, Puerto Rico and the Virgin Islands, tax filing and payment deadlines originally set for early September will now be pushed to January 31, 2018.
According to the IRS, this extended deadline encompasses “most tax returns,” including individual, corporate, and estate and trust income tax returns; partnership returns; S corporation returns; trust returns; estate, gift, and generation-skipping transfer tax returns; annual information returns of tax-exempt organizations; and employment and certain excise tax returns.
Applying for Extended Deadlines
Most impacted taxpayers do not need to apply for these extended deadlines. The IRS will automatically provide filing and penalty relief to any taxpayer with an address of record located in the affected areas.
However, some taxpayers who live outside the impacted area may still be eligible for disaster relief. Filers whose records, businesses or properties are located in the affected areas should contact the IRS at 1-866-562-5227 to determine whether they are eligible.
Casualty Losses & Disaster Area Loss
A casualty loss deduction is available to filers whose property suffers physical damage due to “fire, storm, shipwreck or other casualty or theft.” Casualty losses incurred in an area that warranted federal disaster or emergency declarations from the President of the United States are called Qualified Disaster-Related losses.
With a qualified disaster loss, taxpayers can elect to claim the loss in either of two years: the tax year in which the loss occurs or in the year that immediately precedes it. Choosing to take the deduction in the preceding year may increase the tax savings from the loss and may enable you to get a refund from the IRS before you even file your tax return for the year the loss occurred.
If the damaged property is covered by insurance, the taxpayer must file a timely insurance claim for reimbursement of their loss; otherwise, they cannot deduct the loss as a casualty or theft loss. Furthermore, the taxpayer must estimate the amount of insurance proceeds to be received when calculating the amount of casualty loss.
When filing their returns, affected taxpayers claiming disaster loss should clearly identify the storm to which they are referring. For example, Florida residents claiming damages incurred by Hurricane Irma should write “Florida, Hurricane Irma” at the top of their tax return form. The IRS says this helps them expedite the processing of the refund.
Personal casualty losses are generally deductible to the extent they exceed 10% of the taxpayer’s adjusted gross income (AGI) and are subject to a $100 per casualty floor. Form 4684 is used to report the amount of casualty loss. However, for qualified disaster losses, the 10% AGI limitation is waived and the $100 per casualty floor is increased to $500. In addition, taxpayers who do not itemize deductions may claim qualified disaster losses as additional standard deductions, deductible for both regular tax and alternative minimum tax.
For those needing to tap their retirement accounts for living expenses or repairs, the 2017 Act waives the 10% early distribution penalty for taxpayers living in a disaster area and sustaining an economic loss by reason of Hurricanes Harvey, Irma or Maria. Furthermore, the Act allows taxpayers to spread the retirement plan distribution income over a three-year period. In fact the distribution escapes taxation entirely if recontributed to the retirement plan within three years of the distribution. Finally, the Act eases the retirement plan loan rules by increasing the amount that can be borrowed and providing longer repayment terms.
Generally a taxpayer’s deduction for charitable contributions is subjected to AGI percentage limitations and an overall limitation on itemized deductions. The 2017 Act suspends the majority of limitations on charitable contributions for contributions associated with hurricane relief.
Employee Retention Tax Credit
Under the 2017 Act, eligible employers affected by Hurricanes Harvey, Irma or Maria who pay wages to eligible employees during periods of the business’ inoperation can claim a credit for such wages. The credit is equal to 40% of each qualified employee’s wages up to a maximum credit of $2,400 per employee.
To download various tax forms, and to learn more about disaster relief options, visit the official IRS website at www.irs.gov.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.