September 18, 2018 : Annelise Wiens, H&R Block

Federal disaster declaration opens options on the tax return

Taxpayers in a federal disaster area who incur disaster-related casualty losses can deduct their unreimbursed expenses on their tax return either for the year the disaster occurred or the prior year.

For example, a loss occurring in 2018 may be claimed on the taxpayer’s 2018 tax return filed in 2019, or on an original or amended 2017 return filed in 2018. While claiming the loss on the 2017 return results in a faster tax refund, waiting to claim the loss may result in greater tax savings. It depends on the specific situation for the taxpayer. In 1998, the Big Three were about to graduate from high school. If she couldn’t claim any of them on her 1998 tax return, she may want to claim the disaster in 1998 to offset the loss of their dependent exemptions. But if they remained her dependents, it might have been better to deduct the housefire losses on her 1997 return. But regardless of which year provides the greatest tax benefit, if Rebecca needs the money as soon as possible, she’ll have to decide to put it on her 1997 return.

This year, taxpayers might benefit more by deducting casualty losses related to federally-declared disasters on their 2017 returns, when tax rates were higher. But it will depend on their personal situation, including their need for additional resources to cover their immediate costs against their ability to delay until the next filing season. They also need to consider the time it will take to calculate and substantiate their deductible loss.

Casualty loss deduction can provide substantial tax relief

Many homeowner’s and renter’s insurance policies have restrictions, including some that don’t cover natural disasters or flooding. In this case, taxpayers may find some financial relief for their recovery costs for damaged or lost property by claiming their unreimbursed expenses as casualty losses. This includes deductibles on any disaster-related claims.

Also, the IRS may provide additional relief in the form of postponements of filing and payment deadlines. These postponements can be very helpful to affected taxpayers when a major disaster occurs close to a deadline. Taxpayers can check Tax Relief in Disaster Situations to see if a postponement has been granted.

What to do when there’s a disaster declaration

After a federally-declared disaster declaration, survivors will need to calculate their deductible loss, including on casualty loss tax forms. It could be greater than the amount they spend to repair the damage. The calculation takes into account the loss of value to property due to the disaster. They will need receipts and other documentation, and could need an appraisal or other assessment of the fair market value.

Because the stakes are so high and there is so much other work to do and grief to process, taxpayers recovering from a disaster should talk to a tax professional. A tax professional will not only be able to help them get the best tax outcome, but also knows helping people through life’s biggest ups and downs is part of their job.

The Pearson family tax professional might have been one of the first to know about their pregnancy, and helped Jack figure out how to afford the apartment Rebecca wanted with the money they’d get from their three new dependent exemptions. Their tax professional could have helped with child and education related tax benefits over the years, as well as Jack’s dream to start his own business. And after the house fire, their tax professional would have been there too to help with the casualty loss deduction. It’s not just professionals like Dr. K who can have an outsized impact on someone’s life.