2017 was the costliest year on record for natural disasters in the United States, according to the National Centers for Environmental Information (NCEI). With a price tag of nearly $306 billion, 16 weather and climate disaster events resulted in unprecedented financial losses across the United States. Requests for federal disaster aid jumped tenfold compared to 2016, with 4.7 million people registering with the Federal Emergency Management Agency.
Fortunately, there is some light at the end of the tunnel for those affected! Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area. Depending on the circumstances, the IRS may grant additional time to file returns and pay taxes. Both individuals and businesses in a federally declared disaster area can get a faster refund by claiming losses related to the disaster on the tax return for the previous year, usually by filing an amended return.
Deduction of Disaster Losses for Hurricane Victims
President Trump issued disaster declarations for a number of counties in Texas, as well as counties in Florida and the U.S. Virgin Islands, impacted by hurricanes Harvey and Irma. While this makes residents of these areas eligible for federal financial assistance, it also opens the door for potential tax savings.
If you or someone you know has experienced a significant financial loss due to the recent hurricanes (known as a “casualty loss” in tax lingo), this loss is potentially deductible. The amount of the loss can be determined in one of two ways:
Add up the total amount of expenses that it takes to restore your property to its original condition, minus whatever insurance reimbursements were received. This is the deductible loss.
Obtain a broker opinion or appraisal on the value of your property immediately before and immediately after the casualty. The reduction in value resulting from the casualty, less any reimbursements you receive, is the deductible loss.
Since these areas are government-declared disaster areas, the loss can be claimed either on your tax return for 2017, or you can file an amended return for 2016 and claim the loss for that year. The purpose of allowing taxpayers to claim the loss on their 2016 return is to produce a (relatively) immediate refund which will get money into their hands more quickly than waiting for the 2017 return to be filed.
If you have experienced a substantial loss due to either Hurricane Irma or Hurricane Harvey, substantial tax benefits are potentially available to you. Below is a list of the counties in Florida and Texas, as well as the islands in the USVI, which are eligible for disaster-related tax benefits.
Texas: Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Calhoun, Chambers, Colorado, DeWitt, Fayette, Ft. Bend, Galveston, Goliad, Gonzales, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Sabine, San Jacinto, San Patricio, Refugio, Victoria, Waller, and Wharton.
Florida: Brevard, Broward, Charlotte, Citrus, Clay, Collier, DeSoto, Duval, Flagler, Glades, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lake, Lee, Manatee, Marion, Martin, Miami-Dade, Monroe, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Volusia
U.S. Virgin Islands: St. Thomas, St. John
Tax Credits for Hurricane Victims
The IRS is urging victims of last year’s hurricanes, especially those who lived in areas affected by Hurricanes Harvey, Irma and Maria, to see if they qualify for the Earned Income Tax Credit (EITC). According to the IRS, many people whose incomes dropped in 2017 may be eligible to choose a special option for figuring the EITC, a credit for low- and moderate-income workers and families.
A special computation method, available only to people who lived in one of the hurricane disaster areas during 2017, may enable them to claim the EITC or claim a larger than usual credit. Under this method, taxpayers whose incomes dropped in 2017 can choose to figure the credit using their 2016 earned income rather than their 2017 earned income.
Eligible taxpayers should figure the credit both ways -- the regular way using 2017 earned income and this special way using 2016 earned income -- to see which yields the larger EITC. For more information and special instructions on how to report, see the instructions for Form 1040, Line 66, and Publication 976, available on IRS.gov.
To qualify for EITC, an eligible taxpayer must meet basic rules and have earned income from working for someone, being self-employed or running a business or farm. This includes home-based businesses, the sharing economy and employment in the service, construction and agriculture industries. In addition, certain disability payments may qualify as earned income for EITC purposes. The EITC Assistant, available on IRS.gov, can help taxpayers determine eligibility and estimate the amount of their credit.
Southern California Wildfire Relief
Victims of the wildfires, flooding, mudflows and debris flows that took place beginning on Dec. 4, 2017 in parts of California may qualify for tax relief from the Internal Revenue Service.
Following the recent disaster declaration issued by the Federal Emergency Management Agency, the IRS announced that affected taxpayers in certain California counties will receive tax relief. Individuals who reside or have a business in Los Angeles, San Diego, Santa Barbara and Ventura Counties may qualify.
The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. Relief includes:
Certain deadlines falling on or after Dec. 4, 2017 and before April 30, 2018, are granted additional time to file through April 30, 2018. This includes 2017 individual income tax returns normally due on April 17, 2018. It also includes the fourth quarter estimated tax payment normally due on Jan. 16, 2018
Penalties on payroll and excise tax deposits due on or after Dec. 4, 2017, and before Dec. 19, 2017, will be abated as long as the deposits were made before Dec. 19, 2017.
The Franchise Tax Board and the California Department of Tax and Fee Administration will follow these postponement periods for individuals and businesses in these areas.
If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.
The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.
If you were the victim of a natural disaster in 2017 or any year for which you haven’t already received relief, please CONTACT US right away for assistance. We can help determine if you qualify and possibly reduce your tax liability. Our team of licensed Enrolled Agents and tax preparers know what credits are available and are here to help!