Although Tropical Storm Bonnie and Hurricanes Charley, Frances and Ivan have taken their toll on Florida this season, disaster tax relief affects most preparers at some time during their career.
For the last two years, parts of more than 40 states have been designated presidential disaster areas as a result of severe weather. The designation makes residents eligible for assistance under the Disaster Relief and Emergency Assistance Act, and allows those affected by the disaster to deduct their loss in either the year that it occurred or in the preceding taxable year.
Most taxpayers are not aware of the intricacies of the tax relief that is available to residents of federally declared disaster areas, according to Orlando, Fla.-based CPA Frank Page.
"I don't believe many of them understand the details," he said. "A lot of folks have been asking what their relief will be. Right now it's too early to tell, because they haven't settled with their insurance companies yet."
The Internal Revenue Service has already lengthened the extension period that it had earlier granted for the disaster area counties struck by Bonnie and Charley: Taxpayers in either disaster area generally will have until Dec. 30 to file tax returns and submit tax payments. The IRS will abate interest and any late filing or late payment penalties that would apply.
"The severity of this hurricane season in Florida, compounded by multiple storms hitting the same counties, leads us to provide a longer period of tax relief than usual," said IRS Commissioner Mark W. Everson. "The IRS wants to help during this difficult time."
Under the relief, the Federal Tax Deposit Penalty Waiver Period for employment and excise tax deposits is Sept. 3-20, 2004, and the extension period for returns and other tax payments is Sept. 3-Dec. 20, 2004. Affected taxpayers will have until the last day of the extension period to file tax returns or make tax payments, including estimated tax payments, that have either an original or an extended due date falling within this period.
In addition, the IRS will abate interest and any late filing or late payment penalties that would apply during these dates to returns or payments subject to these extensions.
"Some of my friends were in panic mode before the announcement," said Page. "Personally, I lost nine days of work, so trying to get work done by the deadlines was scary."
Affected taxpayers in a presidential disaster area have the option of claiming disaster-related casualty losses on their federal tax return for either the current or the previous year.
The IRS noted that claiming the loss on an original or amended return for the previous year will get the taxpayer an earlier refund, but waiting to claim the loss on the current- year return might result in a greater tax saving, depending on other factors. Taxpayers claiming a disaster on a previous year's return should put the assigned disaster designation in red ink at the top of the return so that the IRS can expedite their refund.
Individuals may deduct personal property losses that are not covered by insurance or other reimbursements, but they must first subtract $100 for each casualty event and then subtract 10 percent of their adjusted gross income from their total casualty losses for the year.
"The problem with casualty losses is that with Federal Emergency Management Agency and insurance payments, and the 10 percent AGI threshold, not many taxpayers will qualify," said Newport News, Va.-based CPA Rob Carmines.
"We were hit by Hurricane Isabel a year ago, and only a few of my clients actually could take the loss," said Carmines. "It's a tough threshold. I lost a tree that was 32 inches in diameter and 120 feet tall. I may think my home declined in value, but you practically have to get a contract for sale in place and fall through, and show that someone else bid a lower price, before you can prove loss of value. You have to consider that not having trees may actually increase the value of the property - no leaves to rake and no worry about it falling on your roof."
Another factor that confuses taxpayers is the fact that any reimbursement that is received or may be claimed must be subtracted from the amount of the deduction, noted Carmines.
"Many taxpayers are hesitant to place an insurance claim," he said. "But the government says if you're eligible for reimbursement and didn't get it, we won't give you a deduction just because you don't want your insurance to go up."
