DEDUCTING HURRICANE IKE LOSSES--EVEN IF YOU DON'T ITEMIZE 

New tax laws have greatly liberalized the rules for deducting casualty losses related to Federally Declared Disasters, such as Hurricane Ike, that occur in 2008 or 2009. Changes include who can deduct the losses, what's included in the losses, and how the amount of the loss deduction is calculated.

CHANGES IN WHO CAN DEDUCT LOSSES

Normally, only taxpayers who itemized their deductions can claim casualty losses.  However, the new law now allows non-itemizers (those who claiim the standard deduction) to increase the amount of their standard deduction by their deductible loss (see below for how to calculate this amount).

Please note, that this change only applies to disaster-related losses. Other losses, such as fires, follow the normal rules (itemizers only, 10% AGI limitation, etc.)

CHANGES IN WHAT'S INCLUDED IN THE LOSS

While the usual rules regarding non-deductibility of reimbursed losses still apply, taxpayers can now immediately deduct demolition, deductible clean-up and repair, and environmental remediation expenses.

CHANGES IN HOW LOSS DEDUCTION IS CALCULATED

Normally, any loss after insurance or other reimbursement is reduced by $100 before applying the income threshold test.  This is intended to weed out very small losses.  The new law raises the per-casualty floor from $100 to $500 for 2009 only.  This is the only change that has a negative impact on the taxpayer.  We believe it is intended to weed out the relatively small losses so the IRS doesn't get swamped with them.

The great news for Hurricane Ike victims is that the Adjusted Gross Income (AGI) limitation has been waived.  Normally, only the portion of the tentative deductible loss that exceeds 10% of your AGI can be claimed.  In other words, normally you are on your own for losses less than 10% of your income.  But the new law waives this limitation, so any net losses over the $100 per-casualty floor for 2008 are deductible (even if you take the standard deduction).

ITEMS THAT DO NOT COUNT AS CASUALTY LOSSES

• Cost of protecting property against casualty.  Example: cost of insurance, boarding up windows, etc.
• Incidental related expenses.  Temporary housing, rental car, medical treatment (may be deductible as medical expense subject to 7.5% of AGI test).
• Replacement cost.  Bought a couch for $1000 ten years ago.  Value had declined to $100 before the disaster struck, destroying the couch.   Maximum loss limited to $100 (value just before disaster).
• Sentimental value.  Can only deduct fair market value of item on open market.  Value of grandma’s photo probably no more than cost of used picture frame.
• Decline in market value of property in or near area.  Can only claim losses for actual physical damage.  If your property not damaged, decline in value due to nearby damage is not a casualty loss.
• Cost of documenting losses.  Cost of photographs, appraisals, etc. to document your losses are not considered part of the loss.  They may however be deducted as a miscellaneous itemized deduction subject to the usual 2% of AGI floor.
• You cannot deduct "lost wages" as this will already be reflected in your lower W-2 or 1099-MISC.

INSURANCE CLAIMS, REIMBURSEMENTS, GRANTS, AND OTHER REIMBURSEMENTS

Generally, any type of reimbursement for loss (such as insurance proceeds and FEMA grants) reduces the amount of your casualty loss.  These payments are not considered as income.

Most types of disaster relief payments are not considered to be income to the extent that any expenses they are intended to cover (such as food, temporary lodging, clothing) are not otherwise reimbursed by insurance or other reimbursement.

WHEN TO DEDUCT YOUR LOSSES: 2007 OR 2008 RETURN?

Generally, casualty losses are only deductible in the year the casualty occurs (2008 tax return in the case of Hurricane Ike). However, for casualty losses incurred in a Federally Declared Disaster Area, taxpayers have the option of taking the loss on the preceding year's tax return by amending that return. 

Most newspapers and other media outlets publicizing this fact stress that this allows taxpayers to reduce their 2007 tax liability and get a refund earlier, usually within 60 days, rather than waiting to claim it on their 2008 return and getting a bigger refund for that tax year.  Now that we are in the 2008 tax year filing season, for most taxpayers it would be quicker to just claim their losses on their 2008 return and e-file it.

However, for a few taxpayers there may still be an advantage to amending their 2007 return rather than claiming the casualty loss on the 2008 return.  Due to the progressive nature of tax rates, if a taxpayer's taxable income was significantly higher in 2007 than in 2008, the same deductible loss could be worth more (i.e. save more on taxes) in 2007 than in 2008. Ask your tax professional to review your individual situation. 

If you wish to use this strategy, you must do so before April 15, 2009, the due date of casualty year return without extension, otherwise you will have to claim the loss on your 2008 return.

WHEN TO DEDUCT YOUR LOSSES: 2007 OR 2008 RETURN?

Generally, casualty losses are only deductible in the year the casualty occurs (2008 tax return in the case of Hurricane Ike). However, for casualty losses incurred in a Federally Declared Disaster Area, taxpayers have the option of taking the loss on the preceding year's tax return by amending that return. 

Most newspapers and other media outlets publicizing this fact stress that this allows taxpayers to reduce their 2007 tax liability and get a refund earlier, usually within 60 days, rather than waiting to claim it on their 2008 return and getting a bigger refund for that tax year.  Now that we are in the 2008 tax year filing season, for most taxpayers it would be quicker to just claim their losses on their 2008 return and e-file it.

However, for a few taxpayers there may still be an advantage to amending their 2007 return rather than claiming the casualty loss on the 2008 return.  Due to the progressive nature of tax rates, if a taxpayer's taxable income was significantly higher in 2007 than in 2008, the same deductible loss could be worth more (i.e. save more on taxes) in 2007 than in 2008. Ask your tax professional to review your individual situation. 

If you wish to use this strategy, you must do so before April 15, 2009, the due date of casualty year return without extension, otherwise you will have to claim the loss on your 2008 return.

OTHER THINGS TO KEEP IN MIND 

Please note that casualty loss refers to physical damage only, costs associated with evacuation only are not deductible. Generally, if in subsequent years a taxpayer receives a reimbursement of casualty losses claimed on an earlier original return, no amended return if filed, but the reimbursement is instead claimed as income in the year received. Reimbursement for losses claimed in regard to Hurricanes Katrina, Rita and Wilma in 2005 are an exception to this rule.

The information presented on this page is of a general nature, you should not take any action based on this material without first consulting your tax professional regarding your particular circumstances as each taxpayer's situation is unique. Please see our Legal Notices page for general webiste disclaimers.

TAXPAYERS SHOULD DOCUMENT THEIR LOSSES IN A MANNER SIMILAR TO AN INSURANCE CLAIM. KEEP ANY RELATED PHOTOS, SALES RECEIPTS, REPAIR RECEIPTS, TEMPORARY REPAIR COST RECEIPTS, ETC.  KEEP COPIES OF ANY PAPERWORK SENT TO OR RECEIVED FROM INSURANCE COMPANIES.

SO WHY CAN'T I FIND THIS INFORMATION ON THE OFFICIAL IRS WEBSITE?

The reason you can't find this information on the official IRS website (www.IRS.gov) is that it isn't there yet!

In fact, it is very difficult to find it anywhere on the internet. Although it is mentioned on the Vinson & Elkins (a large Houston law firm) website http://www.vinson-elkins.com/resources/pub_detail.aspx?id=11934.  The subject has also been addressed in written materials available through Edward Jones and Thomson Reuters.

The lack of information concerning the special treatment of Hurrricane Ike casualty losses is probably due to the fact that it is buried in the "Emergency Economic Stabilization Act of 2008" which became law in early October.  This is the infamous $700 billion bailout bill.

• Division C - Tax Extenders and Alternative Minimum Tax Relief
• Title VII - Disaster Relief
• Subtitle B - National Disaster Relief
• Section 706 -

EXAMPLE HURRICANE IKE CASUALTY LOSS DEDUCTION CALCULATION

For this illustration assume the following:

1. Purchase price of home: $170,000.
2. Cost of pool added to home after purchase: $30,000.
3. Fair Market Value of home immediately before Hurricane: $285,000.
4. Fair Market Value of property after Hurricane: $40,000 (value of land and foundation).
5. Insurance proceeds: $130,000.
6. Your 2008 Adjusted Gross Income: $75,000.

Calculation:

FMV before Loss    $285,000

-FMV after Loss     -  40,000

Actual Loss            $245,000

-Basis (cost)           -200,000  ($170k cost + $30k pool)

Lower of Loss

or Tax Basis           $200,000  (cannot count appreciation)

-Insurance              -130,000  (check your policy today!)

Net Loss                $  70,000

Per Incident floor   -       100

Tenative Loss        $  69,900

10% AGI Limitation    -           0  (normally $7,500, waived for

                                              Hurricane Ike victims)

Deductible Loss      $    69,900

IKE TAX RELIEF REGARDING DUE DATES

On October 14, 2008 the IRS updated IR-2008-107, it's announcement of September 18, 2008 to add 5 more Texas counties to the disaster area: Gregg, Harrison, Rusk, Shelby, and Smith. 

On Septemeber 18, 2008 the IRS announced tax relief for taxpayers adversely affected by Hurricane Ike. 

Please note that this supercedes the earlier announcement on September 12, 2008 which granted only a 7 day deadline postponement.

AFFECTED TAXPAYERS

The following are considered to be "Affected Taxpayers" eligible for relief:

• Residents of covered disaster area
• Businesses whose principal place of business is located in covered disaster area
• Taxpayers not in the covered disaster area, but whose tax professional's office is in the covered disaster area. THIS MEANS THAT ALL OF OUR CURRENT CLIENTS ARE CONSIDERED TO BE "AFFECTED TAXPAYERS".
• All relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in the covered disaster area.

• See box on the right for a list of counties/parishes in Texas and Louisiana included in the Presidentially Declared Disaster Area. 

TAX RELIEF GRANTED

The IRS has granted taxpayers an extension to file certain returns and make certain tax payments due to the hurricane. Hurricane extensions apply to these items provided that they had either an original due date or extended due date on or after Sept. 7, 2008 and before January 5, 2009.  This includes 2007 individual tax returns (Form 1040) which already had a valid extension until October 15.  It does not apply to 2007 returns for which an extension was not filed by April 15, 2007.  Sorry, it is too late to apply for an extension now.

• Tax payments, including individual estimated tax payments due 9/7/08-1/4/09.
• Individual Tax Returns (Form 1040)
• Corporate Tax Returns (Form 1120)
• Estate and trust income tax returns
• Partnership Tax Returns (Form 1065)
• S-Corporation returns (Form 1120S)
• Estate, gift, and generation-skipping transfer tax returns
• Employment and certain excise tax returns

The due dates for employer payroll tax deposits has not been extended.  However, for deposits originally due on or after 9/7/08 and before 9/22/08, the IRS will abate penalties provided they are made on or before 9/22/08.

The IRS computers should handle all of this automatically.  However, if the IRS notifies you of any penalties, clients should call our office and we will handle the matter for you.

FEDERALLY DECLARED DISASTER AREA

The entire Houston-Galveston area is included in the disaster area. 

Please note that 5 more Texas counties were added to the list on 10/14/08 (Gregg, Harrisson, Rusk, Shelby & Smith).

The specific Texas counties and Louisiana Parishes that now constitute the disaster area are shown below:

TEXAS COUNTIES:

Angelina, Austin, Brazoria, Chambers, Cherokee, Fort Bend, Galveston, Gregg, Grimes, Hardin, Harris, Harrison, Houston, Jasper, Jefferson, Liberty, Madison, Matagorda, Montgomery, Nacogdoches, Newton, Orange, Polk, Rusk, Sabine, San Augustine, San Jacinto, Shelby, Smith, Trinity, Tyler, Walker, Waller and Washington.

LOUISIANA PARISHES(COUNTIES):

Acadia, Beauregard, Calcasieu, Cameron, Iberia , Jefferson, Jefferson Davis, Lafourche, Plaquemines, Sabine, St. Mary, Terrebonne, Vermilion and Vernon.