2017 has had many disasters nationwide that spurred Congress to pass the “Disaster Tax Relief and Airport and Airway Extension Act”. Because of this Act, many changes have occurred that greatly benefit taxpayers who experience disaster losses.
If you have damage from a storm, theft, auto wreck, fire, flood, earthquake, break in, or other disaster, you need to contact the police and your insurance company. Once you have filed a claim, your next step is to total the amount of your losses. After your insurance company has reimbursed 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 nice 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 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 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 This will save you 10% of what you have withdrawn (that’s the amount of the early withdrawal penalty, normally).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 & CTC) also receive some relief, for the 2017 tax year. In these cases, 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 2017 can be listed on your amended 2016 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. If the loss is great 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:
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