Disaster Relief and Taxes

Disaster Relief and Taxes 

Vermont counties declared as Federal Disaster Areas in 2011 due to spring flooding:  Addison, Caledonia, Chittenden, Essex, Franklin, Grand Isle, Lamoille, Orleans, Washington.  

Vermont counties declared Federal Disaster Areas due to Tropical Storm Irene: all counties except Grand Isle County.

What should I do if I suffered damage in a Federal Disaster Area?

How do I apply for FEMA assistance?

Is there help available for businesses?

What if I lost tax records in the flooding?

What can I claim a tax loss for?

What information do I need to make a claim on my taxes?

How do I prove the cost of property and improvements?

How do I determine Fair Market Value?

Can I use the cost of repairs and cleanup to determine my loss?

What tax forms will I use?

Do I need to have proof?

What should I do if I suffered damage in a Federal Disaster Area?

First, you should file an insurance claim.  Whether insurance will cover part of the damage or none of it, keep any documentation you receive.  This will help when you need to prove your loss to the IRS.

Second, you should apply for FEMA assistance.  Apply right away; there is a deadline.  FEMA will want to know your insurance information.  Whether assistance is granted or not, keep any documentation you receive.  The IRS will want to know how much FEMA is covering, and the documentation will help prove this.

Homeowners may be eligible for Small Business Administration loans, as well.  You must first register with FEMA.  See below for information on SBA applications. 

Finally, determine your remaining loss not covered by insurance or FEMA/SBA assistance.  This is the amount that will be used to determine your casualty loss which will be deducted from your taxes.  The calculation of your loss is discussed below.  The IRS will want proof, so keeping documents is VERY important. 

The loss can be claimed on your 2010 or 2011 tax return.  Consulting a tax preparer is a good idea since casualty deductions can be difficult and they are frequently audited.  You will want to make sure it is done correctly.

How do I apply for FEMA assistance?

The deadline to apply for FEMA assistance has passed.  If you were denied FEMA assistance and need help with the appeal, you can contact Vermont Legal Aid for assistance.  1-800-889-2047. 

Is there help available for businesses?

Yes.  The U.S. Small Business Administration provides low interest disaster loans.  Businesses can apply if they suffered physical property damage or economic injury.  If your business suffered economic injury, you can apply for assistance even if your business is not located in the disaster area. 

You must send in your application by the deadline.  For people affected by storms and flooding April 23 – May 9, 2011, the deadline to return applications for physical property damage is August 15, 2011.  The deadline to return economic injury applications is March 15, 2012. 

For people affected by storms and flooding May 26-27, the deadline to return applications for physical property damage is September 6, 2011.  The deadline to return economic injury applications is April 9, 2012. 

Apply Online 

Questions?  Visit www.sba.gov, call SBA at 1-800-659-2955, or email questions to disastercustomerservice@sba.gov.

You can also contact your local Community Action Agency for assistance.   

What if I lost tax records in the flooding?

Copies of past tax returns are free for people affected by a federally declared disaster area. 

To request copies of tax returns, complete IRS Form 4506.  You can also request account transcripts (computer printout) with Form 4506-T. 

On Form 4506, write “Vermont/ Severe Storms and Flooding” in red ink at the top so that you are not charged. 

Casualty losses caused by a federally declared disaster can be claimed on either your 2010 or 2011 tax return, so you will need prior year returns to determine when it is the most beneficial to take the deduction.

What can I claim a tax loss for?

You can claim casualty losses for your:

·         Home

·         Property

·         Cars or trucks

·         Appliances

·         TVs, stereos, and other entertainment equipment

·         Computers and printers

·         Tools

·         Household goods, such as dishes, towels, sheets, etc.

·         Clothes

The amount of the loss must exceed 10% of your adjusted gross income by $100 (Example: AGI of $20,000 x 10% =$2,000, so loss must be greater than $2,100) 

What information do I need to make a claim on my taxes?

To determine the amount of casualty loss you can deduct, you will need to know what you paid for the property plus the cost of any improvements you made to the property prior to the flood.  You will also need to know the fair market value of the property BEFORE the flood as well as AFTER the flood.  This will tell you the total loss in value.  For the deduction, you will use either the cost of the property or the loss in value, whichever is SMALLER.  You will also need to subtract any amounts paid by insurance and FEMA.

Example: 

Jill bought her home for $150,000.  Before the flood, Jill’s home was worth $190,000.  After the flood it was worth $90,000.  This means her home lost $100,000 in value.  She has to pick the lowest number between what she paid ($150,000) and loss in value ($100,000).  Therefore, she can claim a $100,000 loss.  But Jill also got an insurance payment of $50,000.  She must subtract that from the $100,000 loss.  Therefore, her casualty loss is $50,000. 

How do I prove the cost of property and improvements?

Cost of Home: The best proof is copies of original records.  If you do not have your papers, these places could help in proving what you paid:

1)    HUD One Settlement Statement 

2)    Real Estate Agent who handled the closing of your home

3)    Mortgage Company that loaned you money to buy your home

4)    Deed to your home, in your town land records

5)    Town has property tax records

6)    Bank Records

7)    Online real estate sites sometimes have original purchase price

Cost of Vehicle: If you do not have your papers, try these places:

1)   Car Dealer where you bought the vehicle

2)   If you are making payments, the finance company will have a copy of the original loan

3)   Bank Records

4)   Insurance Company

Personal Property: Start with the most expensive items.  Check these places:

1)   Credit Card Statements

2)   Large stores like Home Depot or Best Buy may keep detailed records of what you bought.

3)   Bank Records

Improvements:  These are different from repairs.  These can be proven by:

1)   Receipts from a home improvement store

2)   Bills from a contractor

3)   Bank Statements

How do I determine Fair Market Value?

The best way to prove what your property was worth is to get an appraisal.  An appraisal is done by an expert who decides what the property is worth.  The IRS may not agree with the amount you claim, so an appraisal is the best proof.

If you cannot afford an appraisal, check these places:

1)   Mortgage Company

2)   Town Tax Appraisals

3)   Insurance Company

4)   Insurance Adjuster’s Report if filing an insurance claim for flood damage.  This will show current value.

5)   Your town may do new tax appraisals because of the flood.  Call and ask if your town is doing this.

Fair Market Value of Vehicles: Try these places:

1)   Kelley’s Blue Book (www.kbb.com)

2)   NADA (www.nada.com)

3)   Edmunds (www.edmunds.com)

4)   Insurance Adjuster for your insurance company

Fair Market Value of Personal Belongings: It is harder to prove what furniture, stoves, refrigerators, clothing and other belongings are worth.  Take pictures to prove the flood damage.  Also try:

1)   Old catalogs may help show what the items cost

2)   Check prices at local thrift stores.  Find items like the ones you own.  This shows what your belongings are worth now.

Can I use the cost of repairs and cleanup to determine my loss?

If you cannot get an appraisal, you can also use the cost of repair and cleanup.  Just remember that an appraisal is the best proof.  If using the cost of repair and cleanup to calculate your casualty loss, the repairs must make the property like it was before the flood, the cost must be reasonable, and the repairs CANNOT make the property worth more than it was before the flood.  You must pay for the repairs and you will need to keep receipts to prove the cost to the IRS.

What tax forms will I use? 

To calculate and report casualty losses, you will need to complete tax form 4684.  If you choose to claim the loss for 2010, you will need to amend last year’s return using form 1040X.  You will then need to complete and attach form 4684 with “Vermont/ Severe Storms and Flooding” printed in red ink at the top of the forms.  The deadline to amend your 2010 tax return is April 15, 2012.  If you have a new address, complete form 8822 to notify IRS so that you will receive any necessary notifications and correspondence. 

If you have a casualty loss, you should seek assistance with your taxes.  Professional tax preparers will be able to determine which year would be more beneficial to claim the loss in and will be able to complete the necessary paperwork.

Do I need to have proof?

The IRS will most likely want proof of the loss.  Now is the time to start collecting that proof.  Take pictures, gather paperwork, get an appraisal, search bank records, etc.  Make sure to keep all documents you receive from your insurance company and FEMA.  This way you will be ready to do your taxes. 

(More examples of proof are listed above.)   

*Affected taxpayers should seek tax assistance in filing or amending their returns with casualty loss deductions

*Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

*This information is provided with generous assistance from Robert B. Nadler, Legal Aid Society of Middle Tennesses and the Cumberlands.  Each case is different and needs individual legal and tax advice.