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How to report loss to the IRS

The curb appeal of homes and businesses has been impacted by Hurricane Michael on October 10, 2018. Reporting the losses to the IRS is part of the financial recovery process that the tax payer will need to do in the 2018 or maybe the 2017 income tax returns. The Tax Cuts and Jobs Act (TCJA) signed in 2018 does change how casualty losses are reported.

In general, the TCJA raises the bar for claiming a tax deduction for a personal casualty loss by mostly eliminating personal casualty loss deductions beginning in the tax year 2018. However, if the casualty loss is a federally declared disaster and your property is in the declared disaster zone, the taxpayer can make a special election to report the loss in the preceding tax year of the loss. The election has to be made no later than six months after the federal filing due date for the year of the disaster not including extensions.  Individuals claiming a casualty loss for personal use property report casualty losses as an itemized deduction on Form 1040, Schedule A. When to report the loss is dependent on the individual’s circumstances, including:

  • AGI in each year
  • When returns were filed
  • Taxable income in each year
  • Need for cash

Different tax rules apply to the 2016-2017 tax years compared to 2018 and beyond. So, to determine the best result for the taxpayer, each circumstance should be considered. The best evaluation method is to input the loss numbers in each year’s tax return and calculate the result.   

Losses Exceed Income (Net Operating Loss)

Once the loss is reported in the proper year to maximize the taxpayers benefit, a net loss may be the result. Individuals, just like businesses can have a net operating loss, especially with reporting casualty and disaster losses. Although the TCJA eliminates the carryback of NOL’s to a previous year, it does allow for a carryforward to future years without an expiration period.

Retirement Plan Used for Disaster Recovery

The IRS has made provisions to relax regulations relating to Retirement Plan Hardship Distributions. 401(k) plans and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of both Hurricane Michael and Hurricane Florence. And, members of their families may also be eligible. A person who lives outside the disaster area can take a loan or distribution for assistance to a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area. The ‘relaxing regulations’ means that the taxpayer will be able to access their money in the retirement plan easier and faster. Although access to the retirement plan money is much easier, the tax treatment of loans and distributions remains unchanged. Loans are typically not taxable, but distributions are subject to a 10-percent early withdrawal tax.

Calculating the Loss

The taxpayer will need to compile records to support the amount of the loss deducted. The loss to be reported is the smaller of:

  • Adjusted basis in the property before the casualty
  • Decrease in the fair market value (FMV)

The adjusted basis of property is generally the purchase price and adjustments for events, such as an increase due to improvements.  The FMV is generally the value that the property can be sold. The FMV will have to be determined prior to the casualty and immediately after the casualty.  Without an appraisal of the property to provide the decrease in the FMV caused by the casualty, the actual cost of the cleanup and repairs can be used to determine the amount of loss.  This is a safe harbor method available for determining the casualty loss from a federally declared disaster. A safe harbor method is also available to help determine the casualty loss for personal belongings.  

The calculated casualty loss figure will also need to be decreased by any insurance reimbursements that have been received or expected to be received.  Insurance payments received to cover living expenses when the use of the main home is lost does not reduce the casualty loss. If the insurance reimbursement is more than the adjusted basis in the property then a gain will be reported and may be subject to tax.   

Hopefully, this explanation helps with the basics of reporting an individual personal property casualty loss.  Many resources can be found at IRS.gov to assist with questions or you may want to consult your friendly CPA.   

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Preparing for 2018 Taxes


As we approach the end of 2017, tax time is around the corner. The changes of the Trump Tax Plan and the post card tax return will happen in 2018. So, we have another year of the old rules and forms. While taxes can be really complicated, getting your taxes done can be a breeze, you just need to hold on to a few pieces of paper and be prepared to answer a few questions for your accountant. Here are few tips for making sure this tax season is pain-free.

 

  • Form Numbers Are Your Friend! Trying to decide what to hold on to for your tax return can be overwhelming. Many times, tax preparers will get a stack of every piece of paper that has a number and a dollar sign on it. While we do appreciate detail, we also appreciate getting you a return as quickly as possible! The most important tax documents will have a form number. These are the most important things to hold onto. If you get something in the mail that says “Tax Document” on the envelope, chances are it is a form of some variety and it should be kept.
  • The Many Faces of 1099s. 1099s come in all shapes and sizes. The type will be designated by either a letter or a word added on to the end. For example, a 1099 that tells you how much money you earned in bank interest is a “1099-INT”. The most common type is a 1099-MISC, or Miscellaneous. This is typically used to show money made as a subcontractor, or someone who wasn’t having taxes taken out of their earnings. If you receive any form of 1099, hold on to it. You will need to report it on your tax return.
  • Do you C? If you run your own business as a sole proprietor, you don’t need to file a separate return. You do, however, need to fill out a Schedule C on your individual tax return. The Schedule C, Profit or Loss From Business, requires your yearly numbers pertaining to income and expenses. Completing this schedule will be much easier if you have a bookkeeper. A bookkeeper will track your income and expenses by type, often corresponding with the required fields on the Schedule C. If you do not have a bookkeeper, and have not been tracking your expenses, you will have to provide your company’s bank and credit card statements for the year.
  • The Venerable W-2. Chances are, you will receive this in January or February. In short, the W-2 shows you how much you made, and how much was taken out for Federal taxes, Social Security and Medicare, and State Taxes (if applicable). It will also show you how much was taken out for any sort of health plan, or dependent care, along with several other items if they pertain to you. The W-2 is the backbone of your tax return. You should receive one from any job you worked at over the course of the year in which you were officially on a payroll. Basically, if you filled out a W-4, you will receive a W-2.

 

Filing your taxes doesn’t need to be some mystery. More than anything, it is about being prepared, and following instructions. Well, and having a great deal of patience. But as long as you have everything you need, and are willing to take the time to read items over, you will be able to file your taxes without any major hiccups.

 

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