After a significant event, taxes in disaster-prone areas generally increase. To be prepared, you need to know how to manage your tax returns in the year following a natural disaster. If your home or property was damaged, there are many financial tactics that you can adopt to lessen the financial cost to you and your family.
Disaster Loss Reduction
If your home or personal property suffers any damage, you may be able to deduct the loss on your federal income tax return. You can claim the loss sooner if your area receives a national disaster designation.
Generally, a deduction is possible only if the loss is significant and not covered by insurance or another reimbursement. If you have a homeowner’s insurance, you must file a timely claim for a refund of your loss.
As a general rule, you can deduct a casualty loss in the year it happened. Nonetheless, if you have a loss from a federally declared disaster, you may have a choice to deduct the loss on your return for the year in which the disaster happened or on an amended return for the preceding tax year.
This means that if a disaster occurred in 2018, you can claim the loss before the end of the year. Alternatively, you can decide to claim it on your 2017 return. You can obtain a lower tax for that year if you claim a disaster loss, as it often produces a refund.
Calculate Disaster Loss
The simplest way to calculate disaster loss is to take the lesser of the adjusted basis of the property or the decrease in fair market value and subtract any insurance or another compensation that you receive or expect to receive. Alternatively, you can define the reduction in your property’s fair market value by hiring a professional to carry out an assessment of the property.
Consult a Professional
Finally, you may want to ask an accountant or another financial professional regarding paying taxes on any assistance you have received. There are many organizations and governmental bodies listed in the Catalog of Federal Disaster Assistance (CFDA), which includes disaster assistance, crisis counseling, disaster legal services, unemployment programs, and the National Flood Insurance Program, as well as FEMA grants.
It’s relevant to note that some of these programs are not regarded as income by the IRS. For instance, IRS does not consider the federal disaster loans facilitated by the Small Business Administration (SBA) as income and, therefore, it will not have an effect on your taxes. Likewise, IRS regards funds from charitable organizations, your employer, or even family and friends as “qualified disaster relief programs” and are not calculated as income, as long as the money went to expenses not covered by insurance. If you obtained qualified disaster relief payments to reimburse you for specific losses, you should subtract the amount of those payments when calculating your losses.