Casualty, Theft and Disaster Losses 

Hurricanes Harvey, Irma, Jose and Maria all made their impact felt back to back. Images of flooded streets, devastated homes and shattered families tugged at your heart. The year 2017 witnessed many disasters nationwide that spurred Congress to pass the “Disaster Tax Relief and Airport and Airway Extension Act”. Due to this Act, many changes have occurred that greatly benefit taxpayers who experience disaster losses.

Rebecca’s family of six, residing in Houston, was severely affected by the category 4 storm that hit Texas. They lost their house and many valuables. While monetary compensation can never make up for their loss, but it can at least help them in slowly regaining normalcy, especially after the crippling effect of the devastating disasters.

If you experience damage from a storm, theft, auto wreck, fire, flood, earthquake, break in, terrorist event or other disaster, you need to contact the police and your insurance company. Once you file a claim, your next step is to total the amount of your losses. After your insurance company reimburses you (if any), your Casualty Loss is what is left over.

The tax relief or benefit of a casualty loss is an Ordinary Tax Loss on your tax return and provides tax relief that may PAY YOU in your time of need. This type of loss is an additional tax deduction, on top of any standard deduction you might take, and adds extra expenses to any itemized deductions. While the disaster is terrible and may be devastating at the time, it’s heartening to know that the IRS gives you some relief on any taxes you might otherwise pay.

If the disaster is in a Federal Declared Disaster Area or Zone, you will also qualify for a delay of time on when your tax returns and tax payments must be filed or paid. Each disaster will have different time frames, but you could get up to an extra year to have to file returns. See Azmoneyguy or your tax professional for these time specifics.

Another relief you can benefit from is that if you need to withdraw funds from your retirement account, you will not be hit with an early withdrawal penalty! This will save you 10% of what you have withdrawn (that’s the amount of the early withdrawal penalty, normally).

Those taxpayers who might be able to claim Earned Income Tax Credit or Child Tax Credit (EITC and CTC) also receive some relief, for the disaster tax year. As an example, individuals affected by Hurricanes Harvey, Irma and Maria, who earned less income in 2017 than 2016, can use the 2016 amounts reported, to claim EITC or CTC in 2017.

Also, you might be able to take the current loss backward and amend your past tax returns for immediate refunds. For example, a loss that occurs in 2019 can be listed on your amended 2018 tax return, so that you can immediately file for a refund and use the money to help you get back on your feet. Use IRS forms 4684 and 1040X to amend past returns. Or you may use the amount of your disaster loss on your current year tax return, on IRS form 4684 if it has not been filed yet. 

It is possible for a casualty loss to use up all income for the past year, plus your current year. This is known as a Net Operating Loss (NOL). If the loss is large enough, you may have no taxes for the past year, the current year, or some future years, depending on how great the loss is compared to your income. If casualty losses exceed your income, you have a loss in that year and could pay no taxes. And you get to carry excess losses backwards or forwards, to help you get back on your feet.

Here are some things to remember:

• Losses can occur for many reasons: theft, fire, storm, auto wreck, earthquake, terrorist event and other sudden disasters
• The amount of the loss, after insurance reimbursement, is your Casualty Loss deduction
• You can amend your prior years’ tax returns for the current loss you experienced (File IRS forms 4684 and 1040X), or you can use the Casualty Loss in the current year (your choice)
• You may qualify for delayed time to both file returns and pay taxes up to a year after the normal due date.
• Money withdrawn from retirement accounts will not get hit with the early withdrawal penalty (10% of the amount withdrawn, usually)
• Those who qualified for EITC and CTC in the past year, might be able to use that income amount for the current year, to qualify again for extra refunds
• If the amount of loss is great enough to absorb all your income, you have a Net Operating Loss (NOL) and you can carry the loss forward into future years, until the loss is used (investments that were stolen by Bernie Madoff in 2008 were carried backward and/or forward if it exceeded current incomes). These losses helped some taxpayers to not pay taxes for many years, depending on each person’s circumstances.
• For 2018 thru 2025, only disasters declared by the President, qualify for tax relief, stated above. Go to https://www.fema.gov/ and make sure your state had a declared disaster for the year you are filing for.

Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.

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