North Bay fire victim with a financial loss? Here’s what you need to know about tax relief
The first call is typically to their insurance agent to start the claims process, followed by the bank or servicer that is handling their mortgage if their residence is uninhabitable. But fire victims should also consider checking in with their accountant as well to see if tax laws make them eligible for financial relief.
"You should absolutely reach out," said
The federal tax code allows victims of federally declared natural disasters to deduct itemized losses on their tax returns.
But the process to determine eligibility can be complicated. Accountants suggest contacting them for assistance, especially because large-scale natural disasters don't occur as frequently here as, say the
"It's fairly complicated," said
Residents should first try to get as much payout from their insurance policies as they will allow, Dillwood noted, because it will generate a better sum.
"Getting some money from your insurance company is better than getting a bigger (taxable) loss," he said.
He estimated that money recouped through the tax code would generate up to
Taxpayers can deduct their casualty property loss, which is defined by the
Those who have received emergency grants from the
To calculate the amount of the loss, taxpayers will need to determine the "adjusted basis" of the property before the fire. The adjusted basis is the amount of money paid for the home plus any subsequent improvements made to the structure.
They also will need to find the decrease in fair market value of the property in the aftermath of the disaster. That's the difference between the price a displaced homeowner could sell his land for now, versus what it could have been sold for prior to the fires.
The taxpayer will then select the lesser of those two real-estate calculations and subtract the amount of money he or she received from the insurance settlement for the home.
Personal property such as cars and other items that were damaged or destroyed also can be considered separately under the two calculations mentioned above. Those have to be documented with receipts or photos from smartphones, similar to what an insurance carrier would require.
The survivor would then combine the amounts calculated for each piece of property lost in the fire and reduce that by
Yet depending on reimbursements from insurance carriers, some taxpayers could end up owing Uncle Sam.
"You can actually end up with a gain," that's considered taxable, Tompkins said.
The issue is further complicated if the homeowner operated a business out of his residence because business deductions are treated differently under the law, with their own depreciation schedule, Dillwood said. A taxpayer would have to calculate the percentage of the house used as a residence versus that devoted to a business.
"It adds a lot more complexity, for example if you are running an eBay store out of your home," he said.
Another crucial decision is when to file and for what tax year. Already, the
Notably, federal law allows those who suffered major damage from a natural disaster to amend their 2016 filing to claim the deductions immediately instead of waiting for the 2017 tax year.
"Why is that good? Money now is better than money later," Dillwood said.
But he cautioned that the taxpayer should "file an amendment with an estimate a little on the low side" so they will not end up owing taxes once the true costs are added up.
"If you are making a wild guess because you want to get some cash back now, the
Some may opt to wait until next year to file, especially those who will likely see a loss in income as a result of fires, such as those who may have a home business, Dillwood said. That would make it more feasible to file the loss next year on the 2017 form.
The issue over tax breaks for natural disasters took on even greater importance last week.
Rep.
That law for hurricane victims removed the requirement that taxpayers in those federally declared disaster areas would have to itemize their returns to get relief and that their losses must exceed 10 percent of adjusted gross income. It also allowed penalty-free access to retirement monies such as 401(k) funds and temporarily suspended the limitations on the deduction for charitable contributions associated with hurricane relief.
"The folks in
Thompson has co-sponsored a bill with his Democratic colleagues that would provide certain retroactive tax benefits to taxpayers who have suffered from natural disasters since 2012 and continue them into the future, a time frame that would include the recent wildfires.
Brady told Thompson that he intended within the month to put forward separate legislation that would provide those same additional benefits to victims of the
"This is the wrong message to send to people who have just had their entire life turned upside down," Thompson complained.
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