Jackson Hewitt Tax Service wants preparers and their clients to be aware of key disaster-related tax considerations in the wake of Superstorm Sandy.
"Several areas have been noted as federally declared disasters, which allows taxpayers to claim their losses on their 2012 tax returns when they file in the coming months or to amend their 2011 tax returns to file the claim," said Mark Steber, chief tax officer for Jackson Hewitt. "By amending your return, you can get your refund for the loss sooner, but be sure to compare your tax situation and adjusted gross income for both years to determine whether it is to your tax advantage to claim the loss in one year rather than another."
Among the recommended steps:
• Document loss: Clients should take photographs or videos of the damage to property, as well as any repairs made, and keep receipts for any repair or clean-up work. Costs for repairs or clean-up cannot be deducted on a tax return, however. Where these expenses are helpful to note is when determining any decline to the fair-market value of the property, as long as the expenses are incurred to restore property to its original condition. Jackson Hewitt recommends its Home Inventory Guide as a tool to help.
• Know what to file, and how: Claim casualty loss on Form 4684, Casualties and Thefts. Clients must be able to itemize deductions on a federal return to claim a loss.
• Do not wait to file an insurance claim: If property is covered by insurance, clients should file a timely claim. The IRS generally limits an allowed loss to the amount of loss after any insurance reimbursement a client got -- or should have gotten.
• Spend insurance reimbursement money wisely: Clients have two years to replace any damaged, destroyed or lost property. If they meet this time requirement, their insurance reimbursement will not be taxable even if it exceeds their basis in their property. If clients do not purchase property similar or related in service or use to the property they are replacing, part of the reimbursement may be taxable. If the property they are replacing is their home, they may be able to exclude up to $250,000 (or $500,000 if married filing jointly) for taxable gain. If they are in a federally declared disaster area, the deadline to replace property is extended to four years. Be aware of the guidelines that apply and plan accordingly.
• Track payments received: Payments clients receive may be excluded or included in income if restrictions were attached regarding how clients spend the money or if they received the payments as part of relief provided to individuals in a federally declared disaster area. These payments also affect the calculation of allowable casualty loss. Have clients keep records of all types of disaster relief payments from organizations such as FEMA, documentation or checklists, and any Small Business Administration appraisals.
Jackson Hewitt's online Recovery Tax Guide offers more information on claiming casualty and theft losses and guidelines for replacing identification and documents.