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| The Basics | The IRS does its part for Katrina's victims
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The storm caused billions of dollars in damage. The U.S. tax code is set up to help mitigate such losses, and more breaks are coming.
By Jeff Schnepper
There's no way to know when a disaster like Hurricane Katrina will strike. But when it does, the Internal Revenue Service may well surprise you and prove itself a source of recovery help.
Already, the IRS has a special Katrina Web page. And, if you were hit by the storm, the IRS has already made some changes that affect you.
If you live in a Katrina-affected area and needed to file a tax return before the storm hit, you now have until Jan. 3, 2006. That affects returns where you applied for extensions and to quarterly estimated tax payments.
If you havent paid what you owe, pay it with your return. No interest, late filing or late-payment penalties will be due for the period Aug. 29, 2005, though Jan. 3, 2006, if the return is filed and all taxes are paid, in full, by Jan. 3.
Businesses have until Jan. 3, 2006, to make federal tax deposit payments without penalty.
More to come
More is coming, courtesy of Congress.
The House and Senate passed nearly identical bills to let victims tap otherwise off-limits retirement accounts without penalty and to help working poor families and parents hang onto tax credits and other benefits that can be disrupted when taxpayers lose jobs, relocate or separate from family members. Senators also voted for rental housing vouchers and aid measures for small business.
Those trees that were knocked over, the roof damage you sustained and the car you lost are all casualty losses. These count as itemized deductions. Of course, you have to fill out extra paperwork and keep good records. And you won't recover dollar-for-dollar the financial losses you suffered. But every little bit helps. For major disasters, it's usually worth the effort to claim the tax write-off.
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If youve ever suffered a disaster, you know the costs quickly add up. In a few hours on Aug. 29, the victims of Hurricane Katrina in Louisiana, Mississippi and Alabama saw homes destroyed, cars and boats lost and lifetimes of memories disappear.
You cant replace the photos and emotional treasures, but insurance will help heal the hurt on the loss of other assets. Check out the limits of your property insurance and auto policies now. Many policies exclude or limit disaster coverage. (For more, see my colleague Liz Pulliam Weston's article, "What your home insurance doesn't cover.") If youre in a potential disaster area, make sure you have any special coverage you may need.
How the casualty deduction is calculated
If youre not 100% covered by insurance -- and few people are -- you can get some money back from the IRS. Heres how the tax code comes into play.
Your loss must meet IRS deductibility guidelines. The agency classifies a casualty loss as the damage, destruction or loss of property resulting from a sudden, unexpected or unusual event. The losses can result from natural or man-made disasters.
Examples cited on the IRS Web site include:
- Fires
- Burglaries and thefts
- Storms, such as ice storms and blizzards
- Tornadoes
- Floods
- Hurricanes
- Earthquakes
- Vandalism
- Mudslides
- Drought (if sudden in nature)
Natural wear and tear isn't a casualty loss. The IRS won't accept claims for lost property, termite damage to your home or the death of your prize elm tree to disease.
Your deduction is subject to limits. The IRS sets two:
- First, you must reduce your loss amount by $100.
- The remainder is reduced by 10% of your adjusted gross income (AGI).
And, yes, you also have to subtract any insurance money you receive for the loss.
You need Form 4684 (click to download pdf file) to figure and report your loss and Schedule A (pdf file) to itemize your loss deduction. When you file your income tax return next year, attach both forms to your individual income tax return Form 1040. You don't have to include supporting documents with your return, but you will need those records to help you complete Form 4684 and to verify your expenses and losses if the IRS ever questions the deduction.
Whats the deduction worth?
Next, you have to figure out the "real money" value of your deduction. Deductions don't directly translate into tax dollars saved, so a casualty deduction of $5,000 won't get you a five-grand refund. Rather, deductions reduce your taxable income. The less taxable income you have, the smaller your tax bill.
After you determine your casualty loss deduction, you must refigure your taxes using the new taxable income amount to see just how much of a refund you'll get.
Heres how a deduction amount might be calculated for a person with an adjusted gross income of $100,000 and a loss of $150,000.
| How much can you deduct from a disaster? | | Total Loss | | | $150,000 | | Insurance settlement | | | -$100,000 | | | Adjusted loss | $50,000 | | Less $100 | | | -$100 | | | Adjusted loss | $49,900 | | Less 10% AGI | | | -$10,000 | | | | | | | Total deduction | $39,900 | | Tax reduction if in a 28% bracket | | | $11,172 |
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An extra break if the president declares a disaster
Victims in places declared disaster areas by the president are eligible for special consideration. Those taxpayers can claim their losses in the tax year the disaster struck, as if it had happened the year before.
That means you can amend your 2004 tax return, and that may pay off. Many taxpayers find that filing an amended return (Form 1040X (pdf file)) and claiming the loss for the previous tax year produces a bigger refund that's paid faster. This often is the case for those who didn't itemize deductions the prior year.
Yes, the paperwork is a hassle. But the IRS provides additional details in Publication 547, Casualties/disasters and thefts" (pdf file). The agency also has a workbook to help you track your losses.
For Hurricane Katrina, the IRS has set up a special phone number: 1-866-562-5227. Callers can ask for a Disaster Tax Loss Kit to guide them through the mechanics.
In addition to its Katrina page, the IRS also has established a Web page where it has compiled tax guidance, updates on state and federal tax relief and other useful links for those seeking additional aid.
Nothing will replace those items destroyed by the hurricane. But the IRS does do its bit to help.
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