I write often on the need to plan ahead for taxes, especially if you want to keep more of your money, get a bigger refund, have a smaller headache at tax time, and for many other reasons. I also write each year about this time on the benefits of having a basic tax plan in case of a disaster or casualty event. We are at the half way point for hurricane season, which some would say is the real start. We are also at the peak of wildfire season. Other disasters know no seasonal timing or cycle, and can happen at any time.
Before you think "that will never happen to me" or "I will deal with it once it happens," remember, a few minutes of advance planning is better than the angst of post-disaster documentation searching and replacement. Plus, looking for documents when you're in the middle of trying to put your life back on track after a disaster is not an added stress you need. You do not have to do much in advance, but doing just a little can save you money, time, headache and even professional expenses.
The tax laws have many favorable rules for people to use if they have been negatively impacted by a storm or fire or theft or other significant loss. There are extensions of time to file tax returns and estimated tax payments; there are rules that allow for deductions of economic loss from a disaster event; there are even rules allowing for faster tax filing that permit a taxpayer to take a tax deduction faster and get tax refund dollars much quicker than the normal filing time. One of the requirements under the tax loss rules to deduct your loss from a disaster is that you be able to prove how much you paid for an item or its basis and how much the property was worth after the disaster. There are several other rules and requirements, but the most important requirement is to be able to adequately document your loss.
That is where a bit of advanced planning can help during an otherwise very traumatic event. Being able to record and recall what all was lost after an event is a very difficult task. In fact, restoring life to normal typically causes the loss computation effort to get even further delayed causing it to be even more difficult to correctly recall and calculate the true tax deduction.
So what is a taxpayer to do to adequately prepare? I generally recommend a couple of simple early tasks and best practices to help prepare you if you are impacted by a natural disaster or other catastrophic event.Advanced planning action steps:
- Locate your prior-year tax returns (at least three years) and make sure they are safely and securely stored along with your other important permanent records. Documents like your home purchase documents and mortgage documents along with birth certificates, passports, and other very import records should be safely protected. Scanning these documents can help you if the originals are lost and there are many safe, cheap (some even free!) and easy to use options for the initiated.
- Take time to create a digital record of your assets. Photographs or short video of your home and other assets with a camera or smartphone can be a great start to what all you own and help with determining both ownership documentation and value.
- Locate your favorite Internet website with a host of disaster management tools including checklists, household inventory lists, websites to disaster contacts and resources. Most are available even on a smart phone and can jumpstart your documentation and outreach efforts.
- Locate your favorite tax professional and get them to help you with a plan and the steps to managing your taxes and claims after a disaster event. Be sure to ask about prior experience with such matters and filing disaster claims on a tax return. Not all tax preparers have this experience.
A final consideration is that these best practices are not just for the "rich" or homeowners or even those with a lot of physical assets. They apply to all taxpayers. Even those who rent can lose their possessions, assets and records. The tax loss rules are based on the value of what you lost. Do not be misled that you will not be impacted if you do not own a home, car and boat.
You don't need to do a great deal in advance for your tax return related disaster planning, but the more you do, then the better your tax return experience is likely to be and the more tax benefits you are likely to get. Be smart, spend a few minutes this year, and each year, locating and protecting your records and important documents, develop a digital library and start to familiarize yourself with the many internet tools, cites and resources that can help both before and after a disaster event. If a disaster happens, you will have many more important things to do than your taxes. But your taxes are important and with a little early effort you can quickly put much needed dollars in your pocket.