As people along the East coast continue to clean up from superstorm Hurricane Sandy, it's a good time to review the tax laws and provisions the IRS provides to help taxpayers and businesses recover financially from the impact of a natural disaster. Nothing is more important than getting life back to normal, but a few best practices while you clean up and get everything fixed, might give you some much needed tax benefit and a bigger refund.
If you were impacted by Hurricane Sandy or are a victim of the recent wildfire in Oklahoma, or a separate disaster this calendar year, you may be eligible for a special tax treatment that allows you to claim your disaster on your 2011 tax return. If you aren't able to claim your 2012 disaster now, there are a number of things you can begin doing in order to prepare for next year's tax deadline, starting with these five tips:
- Know what's not covered. Several costs related to a disaster are not considered deductible losses. These include the cost of repairing damaged property, restoring landscaping to its original condition and cleaning up after a casualty. However, if these expenses meet certain conditions such as an expense incurred to restore your property to its original condition, you may be able to use these costs as a measure of the decrease in fair market value of your property. Damage from routine wear and tear, such as termites, is also not a deductible loss.
- Document your loss. Take photographs or videos of the damage to your property, as well as any repairs. It's also important to keep any and all receipts for repairs or clean-up work. While these are not deductible losses, repairs or clean-up expenses may help establish a decline in the fair market value of your property - again, as long as the expenses are incurred to restore the property to its original condition. If the disaster that affected you is not widely known, be sure to save any police reports or newspaper articles to document the event.
- Know your deadlines. The IRS may postpone certain tax deadlines for taxpayers who are affected by a federally declared disaster. These extensions can push standard deadlines as far back as one year and may include filing income, excise and employment tax returns, paying taxes associated with those returns, and making contributions to a traditional IRA or Roth IRA. The IRS typically publishes announcements about postponed tax deadlines online at www.irs.gov.
- File a timely insurance claim. If your property is covered by insurance, you should file a timely insurance claim for reimbursement of the loss. Not filing an insurance claim may limit your eligible casualty or theft loss to the amount that is normally not covered by your insurance, such as your insurance deductible amount.
- Be aware of federally declared disasters. Additional tax relief may be available if an area is declared a federal disaster area. A full list of 2012 federally declared disasters is available on the Federal Emergency Management Agency website. If you have been affected by a federally declared disaster, you must choose how you will claim the loss - either as part of your itemized deductions for the year in which it occurred or by amending your prior-year tax return and claiming your deductions in the previous tax year. If you have a loss in a federally declared disaster area since January 1, 2012, you may claim the loss on your 2011 tax return or wait until you file your 2012 tax return next year. If you have already filed your 2011 tax return, you may amend the return to claim the loss now.
Unfortunately, natural disasters, and losses from them, occur each year and will continue to impact people's lives, causing personal and financial loss, and in some cases, even severe financial and economic loss. The income tax rules may provide for a small silver lining if the right circumstances apply. There are potential tax deductions, filing delays, extensions of time and other provisions that may help reduce your taxes, get money back, or get money back faster if you are severely impacted. However, as with all best practices to make the most of your tax situation, you need to plan ahead, understand the rules or get help in doing so, and document all of the facts and circumstances as much as you can and as detailed as you can. First and foremost, be safe and protect yourself and your family. After the storm or disaster event, secure your situation and start to get life back to normal. If you have a catastrophic loss, start looking at the income tax return implications and make the most of the rules to get more money back.
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