DEDUCTING SANDY

Hurricane Sandy was the most devastating and expensive natural disaster to hit the East Coast. 

It has been estimated that Sandy will end up causing about $20 billion in property damages and $10 billion to $30 billion more in lost business.  At least 56 people in the U.S. were killed.  More than 4 million people were without power for more than a week. 

While I was lucky to escape the effects of Sandy, just about every one of my New Jersey friends and clients, no matter where they live in the Garden State, was, or still is effected in some way.

If you are a victim of Sandy, you may be able to deduct losses as an itemized deduction on your Schedule A.  Worth repeating – you must be able to itemize to claim any tax deduction for your losses.

Casualty losses are reported on Form 4684 (PDF), Casualties and Thefts, before being transferred to Schedule A.

A casualty is damage, destruction or loss of property that results from an identifiable sudden, unexpected or unusual event – such as a car accident, earthquake, fire, flood, hurricane, storm, tornado, and the like.

Your loss is the lessor of –

•  the adjusted basis of the property before the casualty or theft, or

•  the decrease in fair market value of the property as a result of the casualty or theft.

You cannot deduct the “replacement cost” of an item totally destroyed in a casualty.  If you lost an item that originally cost you $500, but will now cost $700 to replace, your deduction for that item is NOT $700 – it is $500.  The “adjusted basis” of a personal item is generally its original cost.

You must first reduce the loss by any insurance or other reimbursement you receive, or expect to receive. 

If your reimbursement is more than your allowable loss you may have taxable income.  If you receive an unexpected reimbursement in a subsequent year, or if a reimbursement received after your return claiming the loss has been filed is not what you had expected when calculating the allowable deduction, you may need to make an adjustment on a subsequent Form 1040.

Next you reduce the resulting net amount by $100.  This $100 reduction is per incident.  If there is only one casualty or theft during the year the reduction is $100.  If there are two separate incidents, one casualty and one theft, the total reduction is $200.

The total amount of all net casualty and theft losses for the year, after subtracting actual or anticipated reimbursements and the $100 per incident, is then reduced by 10% of your Adjusted Gross Income (AGI).  The remaining amount is what can be deducted.

If the total amount of net casualty and theft losses for 2012 is $9,500 and your AGI is $105,000, you get no deduction ($9,500 - $10,500 = $0).  

If you have a deductible casualty loss in a disaster area, as would be the case with Sandy, you have the option of claiming the loss on the return for the year in which the casualty occurs – your 2012 Form 1040 - or the previous year.  This means that you do not have to wait until next year to get the refund generated by the casualty loss – you can amend your 2011 Form 1040 and get a refund now, when you need the money to replace and repair.

In the past the idiots in Congress have passed special tax breaks related to victims, and those who provide help to victims, of high-profile natural disasters.  While the idiots in our current Congress could not act properly and timely on the expired and expiring tax breaks, they may enact some Sandy relief before year-end, which could alter the rules discussed above. 

Perhaps they will address the “extenders” in the Sandy relief legislation?

On the income side, BUSINESS INSIDER tells us that “There Are Some Hidden Tax Benefits for Hurricane Sandy Victims” –

·   “Storm-related workers compensation: Workers who receive storm-related compensation from their employers won’t face a tax liability. The payments include a number of expenses such as funeral costs.

·   Payments from charities and state programs: Payments from charities, state programs and the Federal Emergency Management Agency (FEMA) will also be tax-exempt, according to the IRS.

·   401(k) loans: Taxpayers will be allowed to borrow funds from their 401(k) retirement savings in to make storm repairs, or under other specific circumstances, without the usual penalties.”

Of course if you were a victim of Sandy you should contact your tax professional for more information and advice.

TTFN