There are few calamities that compare to the damage and loss of a natural disaster. Hurricane Harvey forced thousands of residents from Texas out of their homes and left stranded without power and clean drinking water. Similarly, residents of Florida had to evacuate coastal areas due to flood zones. These events can leave families in a wreck, taking years to recover from. As horrific as these events can be, the IRS provides tax relief for taxpayers living in disaster areas.
Read on to learn more about how the IRS handles tax reliefs and find out if you qualify.
What is a natural disaster?
According to the IRS, a natural disaster is a nature-related event. Usually, these events are hurricanes, floods, earthquakes, and tsunamis. However, there are more. Nonetheless, it was surprising to find mine cave-ins and sonic booms on the list!
Do I qualify?
First, you want to be sure you are the victim of a qualified natural disaster in order to receive tax relief. This means that the President declares a federal disaster by determining if areas are in need of emergency government assistance. Natural disasters also need to meet the qualifications of the Robert T. Stafford Disaster Relief and the Emergency Assistance Act. Look for your disaster area here.
Second, you need to determine if you live in the affected areas. The IRS grants you a one-time extension if you live or conduct business in the disaster areas. This extension is a part of a coordinated federal response based on local damage assessments by the Federal Emergency Management Agency (FEMA).
I provided support to victims, can I still qualify?
Yes! Additionally, the IRS allows tax relief to relatives who provide assistance to victims.
I qualify, now what?
Since you qualify for this tax relief, you not only receive a filing extension but you can deduct casualties and losses. Furthermore, for a disaster-related loss that occurs in 2019, you can deduct these on the 2018 or 2019 tax return. You will need to amend a previously accepted tax return to report losses for the prior year.
Use the links below to find out if your area qualifies for recent tax reliefs.
So far due to Hurricane Dorian, the IRS announced a waiver of the dyed fuel penalty in Florida until September 15, 2019. The penalty relief is available to anyone selling or using dyed fuel for highway use. What’s the catch? The relief is only available if you pay the usual tax of 24.4 cents per gallon for highway use. Additionally, the IRS states that you will not face penalties if you fail to make semimonthly deposits of this tax.
Taxpayers affected by Hurricane Florence will receive extended deadlines who reside in counties of Beaufort, Brunswick, Carteret, Craven, New Hanover, Onslow, Pamlico and Pender in North Carolina. Original or extended due dates that occurred on or after Sept. 7, 2018 will receive an extension to Jan. 31, 2019. If you live outside of disaster areas you should contact the IRS at 866-562-5227 for further instructions. Hurricane Michael victims in parts of Florida and elsewhere will have an extended deadline until Feb. 28, 2019 to file their tax returns.
Are you filing a return for a prior year to claim your losses? By clicking here you can select your state to view all of the tax reliefs and tax years that are eligible for Automatic Relief.
However, for your casualty losses, you must make file your return in the prior year on or before the date that would be six months after the original due date. This excludes extensions for the tax year which the disaster occurs.
For example, if you are looking to report a casualty loss that happened in 2016, and you are planning to amend the prior year (2015 tax return), you will have until October 16th, 2017.
Furthermore, if you choose to amend your return using Form 1040X, you will need to indicate why you are making the election. With this in mind, you must include details such as the name of the disaster, the timeframe or dates of the disaster, and the location such as the state, city, county, town and zip code where the loss of property occurs.
What can I deduct?
According to the IRS, if you qualify, you can deduct casualties. Casualties are properties that are damaged, destroyed or lost from an unusual or sudden event. The expenses are known as a casualty loss and you can use Form 4684 (Casualties and Losses) to deduct your losses. You can deduct:
Loss of inventory: Has the disaster affected your inventory? If you’re a taxpayer with the costs of goods sold, you will be able to deduct this loss as long as it occurs in a disaster area. You will need to decrease your opening inventory for the year of the loss so it will not be reported twice in your inventory.
Main home: Is your home in a disaster area and you spent the reimbursement on the replacement or repairs of your home? You can hold off on reporting this gain. There are specific instructions on how to report replacement property by a natural disaster here.
Unsafe home: If the government requires you to move or tear down your home because it’s unsafe due to the disaster, treat it as a casualty loss for personal-use property. You will receive a notice within 120 days of the declaration of the disaster area and will need this notice to claim your loss.
Your home is considered unsafe if:
- It is more dangerous after the disaster compared to its original state
- Your home is at risk for future destruction after the disaster
For instance, the government issues a demolition order for your home due to nearby mudslides from a storm and they deem it unsafe. This leads to a loss of value. In order to calculate your loss in value, you will need the difference between home’s Fair Market Value before and after the disaster.
Is your property damaged?
In the situation where your personal property is not fully destroyed, calculate the amount of your loss by:
- Your property’s adjusted basis before the casualty
- The amount of your property’s fair market value after the casualty
- Subtract any insurance or reimbursement you are expecting or going to receive from the smaller of both amounts.
Review the IRS natural disaster page for specific information.
The IRS states that you cannot deduct:
- Any reimbursements from federal or state programs and/or insurance companies.
- The loss of a house pet.
- Cost of clean up.
- Replacement cost.
One example the IRS provides you is if you bought a new chair 4 years ago for $300 and a fire destroys the chair. Then, you estimate that it would cost $500 to replace it. If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. You did not have insurance for the chair. Your loss becomes $100, the FMV of the chair before the fire; not $500, the replacement cost.
The IRS requires :
- You need to report casualty and losses during the year of the incident or the year prior.
- The automatic relief extension is not exempt from tax liability deadlines. (If you have a tax due, it must be paid by the tax season deadline.)
You may refer to this link for more information on all items that you cannot deduct on form 4684.
Did you receive a late filing or penalty notice in the mail?
You may receive penalty relief by reasonable cause. The IRS will examine your situation as to why you did not file and determine if you qualify for this tax relief. Simply, call the number on the letter to explain your circumstance.
By the same token, if the natural disaster led to any loss or damage to your documents, the IRS will waive fees and expedite requests for copies of your prior year returns. This disaster resource guide provides helpful sources for more information.
Get back on your feet.
If the storm knocks you down or forces you to a standstill, regardless, RapidTax wants you to get back on track. Share your experiences here or contact our customer service for support. With us, you’ll get your taxes done. Start your 2017 tax return on January 1st.
To keep updated on current IRS information on tax relief in disaster situations, click here.