Waller’s largest office is located in Nashville, Tennessee, and we empathize with the communities affected by Hurricane Harvey. After the May 2010 flood in Middle Tennessee, many of our employees, clients and colleagues were confronted with the daunting challenge of rebuilding after a disaster. Waller established an Employee Relief Foundation, and our attorneys became well-versed with the tax regulations and FEMA rules related to disaster relief. The following provides an overview of some of those rules as a starting point for our home office distant neighbors and our Austin’s office’s neighbors in need.
If you suffered an uninsured or underinsured loss of property due to Hurricane/Tropical Storm Harvey in a county included in the federally declared disaster areas, you could qualify for assistance from FEMA. Additionally, you could be able to claim a disaster loss from the 2017 storms on your 2016 federal income tax return. Furthermore, as discussed below, the IRS has granted extensions to Jan. 31, 2018 for most, but not all, returns that were due on or after Aug.23, 2017 and before Jan. 31, 2018 for “affected taxpayers.”
Federal assistance may be available to assist disaster area victims in those counties designated as a federally declared disaster area eligible for individual assistance (See www.disasterassistance.gov for information on whether your address is eligible for individual assistance). Available assistance includes grants for temporary housing and home repairs, low-cost loans to cover uninsured property losses and other programs.
The program is administered by FEMA, and you can apply for assistance immediately at www.disasterassistance.gov or by calling 1-800-621-3362.
General information on FEMA Assistance and the application process can be found in the “FEMA Individuals and Households Program Fact Sheet.”
For area-specific information, please find your address at www.disasterassistance.gov.
Claiming Disaster Losses against Federal Income Tax
Taxpayers are generally allowed a deduction in calculating their federal income tax liability for casualty losses suffered in storms regardless of whether the casualty was in a county declared a disaster area. If the casualty loss creates a net operating loss, it can generally be carried back two years and forward 20 years. Individuals and certain small businesses with respect to disaster losses, however, may carry back these net operating losses three years. The ability of a taxpayer to use the casualty loss to offset taxable income is subject to a number of limitations.
The rules for claiming casualty losses with respect to personal-use, non-business, non-income-producing property are summarized below:
- Casualty loss is calculated to equal the lesser of the adjusted tax basis of the property or the decrease in the fair market value as a result of the casualty, net of any insurance proceeds or other reimbursements received or expected to be received. Grants, including FEMA grants, that are required to be used to replace or repair property would be considered reimbursement and would have to be subtracted from any loss in calculating the amount of casualty loss for federal income tax purposes. Grants that are not for the purpose of replacing damaged property or unrestricted grants are not subtracted in determining the amount of a casualty loss.
- The casualty loss calculated above is then reduced by $100. This $100 reduction is per casualty event and not per item of property lost.
- After the $100 reduction, you must deduct from your total casualty losses for the year an amount equal to 10% of your adjusted gross income for the year. Thus, if your adjusted gross income is $150,000, and you suffered an uninsured loss of $20,000, after the $100 deduction described above and the 10% limitation, you would only be entitled to a $4,900 casualty loss deduction.
- The casualty loss is an itemized deduction. Casualty losses are not subject to the overall limitation on deduction of itemized deductions. Under present law, however, taxpayers who claim the standard deduction cannot take a casualty loss deduction.
For business and income-producing property, casualty losses are not subject to the $100 threshold and 10% of adjusted gross income limitations that are applicable to personal-use property. Further, if business or income-producing property is completely lost or destroyed, the full adjusted tax basis is allowed as a casualty loss deduction without the need for ascertaining the fair market value of the property prior to the casualty.
Ordinarily, casualty losses, whether incurred in business or personal use, are required to be claimed in the tax year in which the loss occurred. Accordingly, casualty losses resulting from the August 2017 storm would typically be claimed on a taxpayer’s 2017 federal income tax return, which for calendar year taxpayers, cannot be filed until after December 31, 2017.
Significantly, casualty losses incurred in federally declared disaster areas may be treated as if they occurred in the preceding tax year and claimed in that year on the original or an amended return for the previous year.
The counties that have been declared federal disaster areas to date are:
- Fort Bend
- San Jacinto
- San Patricio
For an up-to-date listing of counties see, the following link: www.disasterassistance.gov.
The advantage of claiming a disaster loss in 2016 rather than 2017 is that the victim can obtain a refund of 2016 taxes paid earlier than if the loss is claimed in 2017. Depending on the taxpayer’s individual tax situation, however, the benefit of the deduction may be more or less in 2016 than in 2017. Individuals should carefully evaluate their personal tax situation in making the determination of whether to file or amend their 2016 return with the loss or wait to claim the disaster loss on their 2017 tax return.
The election to deduct in 2016 the federally declared disaster loss occurring in 2017 can be made until six months after the due date (without extensions) of the 2017 return. This election, if made, can be revoked until 90 days after such due date and the loss could instead be claimed on a 2017 return or amended return.
Given the magnitude of the destruction in Houston and the other affected counties from a rain of historic proportions, it is possible that new relief legislation will be passed similar to laws that have been enacted after some past disasters. This could possibly make the tax law regarding disaster losses more favorable for 2017, providing additional relief. Please check with your tax advisor before the end of the year to determine the status of the legislation.
Taxpayers who wish to claim disaster losses on their 2016 return should put the Disaster Designation “Texas, Hurricane Harvey” in red ink at the top of the return to expedite processing. If the 2016 return has already been filed, a disaster loss may still be claimed in 2016 by filing an amended return with the Disaster Designation. A taxpayer must also attach IRS Form 4684, calculating the casualty loss, to its original or amended return.
2016 Form 4684 is available at www.irs.gov/pub/irs-pdf/f4684.pdf.
Because it will be necessary for taxpayers to establish the fair market value of the property before the casualty and after the casualty (except in the case of completely lost or destroyed business or income-producing property) taxpayers should consider whether it will be necessary to obtain appraisals. Taxpayers should also retain all receipts related to repairs of damaged property as the cost to restore the property can be used, under certain conditions, to establish the decrease in fair market value caused by the casualty.
Retirement Plans Can Make Loans and Hardship Distributions to Victims of Hurricane Harvey
The IRS is permitting 401(k) and similar employer-sponsored retirement plans, 403(b) tax-sheltered annuities of public schools and tax-exempt organizations, and 457(b) plans of state and local governments to take advantage of streamlined loan procedures and liberalized hardship distribution rules for employees and certain family members living in Harvey impacted counties designated for individual assistance by FEMA. For eligible counties, go to www.fema.gov/disasters.
The six-month ban on 401(k) and 403(b) contributions that normally applies to employees who take hardship distributions will not apply. Plans will be able to make loans and hardship distributions before the plan is formally amended to provide for such features. The plan may ignore the reasons that normally apply to hardship distributions, which will allow them to be used for food and shelter, and plans may apply certain relaxed documentation requirements.
[See IRS Announcement 2017-11].
The tax treatment of loans and distributions are not changed, however. Ordinarily retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Hardship distributions are generally taxable and subject to an additional ten percent (10%) early-withdrawal tax.
Extensions of Time to File Tax Returns
The IRS has extended the deadline to Jan. 31, 2018 for most tax returns that were due on or after Aug. 23, 2017 through Jan. 31, 2018. This applies to individuals who live in and businesses whose principal place of business in the Texas counties of:
- Fort Bend
- San Patricio
It is possible that additional counties will be added.
This relief applies to most tax returns (including individual, corporate and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift and generation-skipping transfer tax returns; and employment and certain excise tax returns), that have either an original or extended due date occurring on or after Aug. 23, 2017 and before Jan. 31, 2018.
Taxpayers with an estimated income tax payment originally due on or after Aug. 23, 2017 and before Jan. 31, 2018, will not be subject to penalties for failure to pay estimated tax installments as long as such payments are paid on or before Jan. 31, 2018. This includes the quarterly estimated income tax payments originally due on Sept. 15, 2017 and Jan. 16, 2018 and the quarterly payroll and excise tax returns normally due on Oct. 31, 2017. Penalties on payroll and excise tax depositions due on or after Aug. 23, 2017 and before Sept. 7, 2017, will be abated as long as the deposits are made by Sept. 7, 2017.
Certain relief is also provided for taxpayers whose records necessary to meet a deadline are in the designated disaster area are also entitled to relief as well as relief workers affiliated with a recognized government or philanthropic organization assisting in relief activities in the covered disaster are entitled to relief. For more specific information including returns that are not extended please see the IRS web site “Tax Relief for Victims of Hurricane Harvey in Texas.”
At the time of writing this bulletin, there is not an exception for tax return preparers who are located in these or adjacent areas to have an extension of time to prepare and file tax returns on behalf of clients. It is possible that further relief and perhaps additional counties will be added.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.