Q: Tax Playa, what are the rules on disaster areas?
Carrie, Naples FL
A: There are some particular tax advantages for disaster areas, particularly those affected by hurricanes Katrina and Rita. Most of the areas of help include casualty and theft losses, but there are also others...
For more information on this, the IRS has a helpful page on disaster area links.
The first threshold to be met here is the President of the United States declaring a particular region to be a "disaster area." This is done via the Federal Emergency Management Agency (FEMA) and is a typical response to hurricanes, tornadoes, bad storms, earthquakes, etc.
Once that happens, an area becomes eligible for FEMA relief. There is also one area of tax relief that has been available to taxpayers for a long time: advance casualty and theft loss deductions.
We have discussed casualty and theft losses before. As a general rule, property damaged or destroyed can be deducted from income. The limit on the deduction is the adjusted basis minus salvage value (often $0) minus amounts received from insurance. What is left is your casualty loss.
If the property is business use, that is your deduction. If it is personal-use, you must reduce each casualty loss by $100, and aggregate losses by 10% of AGI.
Special Rule for Disaster Areas
Suppose your town was declared a Presidential disaster area in January of 2007. You have a casualty loss (after limits) of $50,000. Under normal circumstances, you would have to wait until the Spring of 2008 to claim this deduction on your taxes.
However, since you are in a disaster area, there is a special rule you can take advantage of. You are allowed to include the casualty loss on your original or amended 2006 return, even if the casualty event happened in 2007. That way, you can get the money more quickly.
Katrina, Rita, Wilma
There are other protections for persons affected by the 2005 hurricanes in the Gulf Coast and Florida. A much bigger explanation of them can be found here. These include:
- Tax filing deadlines were extended
- Charitable donations were expanded
- The 10% of AGI and $100 limits were waived for personal casualty losses
- Involuntary conversions of property do not have to recognize gain for 5 years
- Net operating losses can be carried back 10 years instead of 2
- Up to $100,000 can be taken out of retirement accounts without penalty, and taxable income can be spread out over 3 years (you also have 3 years to pay it back)
- 2004 earned income can be used to calculate eligibility for the earned income credit and additional child tax credit
- Those housing a hurricane victim could claim an additional dependent exemption of $500 per person
- The HOPE Education credit is increased to 100% of the first $2000 in expenses and 50% of the next $2000 in expenses; the Lifetime Learning Credit is increased to 40% of eligible expenses
- Federal mortgage subsidy recaptures, inclusion of canceled debt in income, and temporary tax home rules are eased
- Businesses receive 50% bonus depreciation on assets and structures, and quadrupled Section 179 expensing
- Credits are given or extended to victims for work opportunity, employee retention, housing for employees, reforestation costs, demolition and cleanup, and rehabilitation
- Tax transcripts can be ordered for free by victims