The 2017 hurricane season wreaked havoc across the Southeast, but for those living in federally declared disaster areas, special disaster tax relief is available.
Three Category 4 hurricanes — Harvey, Irma and Maria — ravaged parts of the continental U.S., Puerto Rico and the U.S. Virgin Islands in 2017. Those storms alone caused about $265 billion in damages, according to estimates from the National Oceanic and Atmospheric Administration, and they weren’t the only ones. There were a total of 16 billion-dollar climate disasters in the U.S. in 2017, the NOAA reports.
States up the coast and as far inland as Tennessee felt the effects of the hurricanes. The U.S. Census Bureau says that Harvey affected nearly 22 million people, Irma affected more than 53 million and Maria affected about 3.7 million. Texas, Florida, Puerto Rico and the U.S. Virgin Islands bore the brunt of the damages, as that’s where the storms made landfall, but many residents also endured flooding and power outages in Alabama, Georgia, Louisiana, Mississippi and South Carolina.
Special tax provisions for both individuals and businesses can offset the impact of the three storms’ impact on millions of people under The Disaster Tax Relief and Airport and Airway Extension Act of 2017.
Under the act, deadlines for taxes like quarterly, payroll and excise were extended from Fall 2017 or early January deadlines to Jan. 31, 2018. In Florida, corporate returns and payments were extended to Feb. 15, 2018.
B. Trevor Wilson, partner in the tax and estates practice group at Jones Walker in Baton Rouge, La., says most returns qualify for relief, but filing documents like 1099s and W-2s, which are known as information returns, are not eligible for a deadline extension.
Here are key ways that residents in hurricane-stricken areas can take advantage of disaster tax relief.
You can claim personal casualty losses
Generally, you can’t claim personal casualty losses when doing your taxes, unless you meet certain qualifications, itemize your deduction and your loss exceeded 10 percent of your adjusted gross income (AGI), says Eric Smith, a spokesman for the IRS.
If you suffered damage from Harvey, Irma or Maria, and your uninsured, unreimbursed loss exceeds $500, you can claim it on your standard return without itemizing.
“Most people who suffered significant damage from these hurricanes were probably going to clear that threshold pretty easily,” said Smith.
Though it’s been updated, the aid is similar to tax relief provided after 2005’s Hurricane Katrina, says Smith.
There also are provisions for business owners. Though they vary slightly from individual relief, Wilson says one difference is there is no threshold for loss, so the first uninsured, unreimbursed dollar of loss can be claimed.
How to prove your losses
It may seem like a difficult task to determine your loss, but there are tools to help.
Even if you haven't had a recent appraisal on your home, Smith says IRS formulas can help you determine the amount of loss you can claim. Different tables help calculate damage to your roof, decking and the structure of your home; the cost of interior flooding; and if it was a near or total loss.
IRS revenue procedures provide eight safe harbor methods for taxpayers to use in determining their losses, three of which are specifically for assessing losses due to federally declared disasters and one specifically for Harvey, Irma and Maria victims. Six of the methods apply to personal residential property and two apply to personal belongings. Here’s an overview of the methods:
For losses of personal-use residential real property
Personal-use residential real property includes property that contains at least one personal residence and is owned by someone who suffered a casualty loss (like a hurricane). For these purposes, a personal residence includes single-family homes and individual units of attached properties (like a townhouse or duplex). Owners of condominiums, co-ops and some mobile homes are out of luck — people who don’t own the structural features of their property (like the walls, foundation or roof) don’t qualify. The property is also not considered personal-use residential property if any part of it is used as a rental property or home office for a for-profit business.
As you can tell from the complicated definition above, figuring out if you can claim these losses on your taxes can get tricky — there are lots of rules to follow and exceptions to be aware of. Work with a tax professional to make sure you’re doing it correctly.
Estimated Repair Cost Safe Harbor Method
This method is for losses of $20,000 or less. You have two independent contractors prepare itemized estimates of the costs required to restore your property to its pre-casualty condition. You use the lesser of the two estimates to determine your cost.
De Minimis Safe Harbor Method
This method is for losses of $5,000 or less. You can determine the loss on a good-faith basis, but must keep records of the methods used to determine loss.
Insurance Safe Harbor Method
This method allows an you to use the estimated loss as determined by your homeowners or flood insurance report.
Contractor Safe Harbor Method
This method allows you to determine the decrease in the fair market value of your property by using the contract prices for repairs by an independent contractor. It must be a binding contract signed by both you and the contractor, who is licensed and registered in accordance with state or local regulations.
Disaster Loan Appraisal Safe Harbor Method
Using this method, you can determine the decrease in your property’s fair market value using an appraisal that was prepared for the purpose of obtaining federal funds or federal government loan.
Cost Indexes Safe Harbor Method
This method provides cost indexes for properties based on square footage and geographical area. If you own two or more properties and use this method for one, you do not have to use the cost index method or any other safe harbor method for any other property.
For losses of personal belongings
For these purposes, personal belongings are items owned by people who suffered casualty losses, as long as those items are not used for business and do not maintain or increase in value over time (like antiques). Things like boats, aircrafts, mobile homes, trailers and vehicles are not considered personal belongings in this situation.
De Minimis Safe Harbor Method
This method is for losses of $5,000 or less. Similar to the same method used for property loss, you can determine your loss on a good-faith basis. You must keep records detailing the personal belongings affected and the methodology used to determine loss.
Wilson says one way to calculate the loss of personal items is to use third-party prices from resellers like Goodwill, which publishes its prices as reference.
“Something you’ve had for five years is not worth something you bought brand-new,” he added.
Replacement Cost Safe Harbor Method
Using this method, you can determine the decrease in fair market value of personal belongings by estimating the cost of replacing each item minus 10 percent for each year the item was owned. If owned for nine or more years, the pre-disaster value is 10 percent of the cost of replacement. If using this method, you must apply it to all personal belongings that are claimed as a loss for that disaster.
You can borrow from your qualified plan
Special provisions allow hurricane victims to take penalty-free hardship withdrawals from qualified plans like their 401(k). For example, if a person is less than 59 ½ years of age, there is typically a withdrawal fee of 10 percent. But under the new law, the fee is waived and the amount you’re allowed to borrow increases to either $100,000 or 100 percent of the account balance, whichever is lower. (The limit is usually $50,000.)
“Generally, you have limitations on what you can use loans for and your employer must allow for them,” said Wilson, “but this relief kind of overrides all that and gives you quicker access to your 401(k) plan for loans.”
Smith says using this option is an individual decision. Although it could be helpful, make sure that there isn’t another option that doesn’t deplete your retirement fund.
If it is something you feel comfortable doing, the typical five-year repayment period can be extended an extra year, as well.
You can file for this year or the previous year
“One of the things that’s unique about disaster area loss claims is that you can choose to report it for the year that it happened, or the prior year,” said Smith. “It sets up a different situation than what normally occurs in the tax world.”
The process can take a while, because you have to prepare an amended tax return on paper, he says.
If your income looks the same on your 2016 and 2017 returns, Smith recommends filing for 2017. However, if your income or tax bracket changed and amending 2016’s return would yield a bigger refund, that option is available.
Whether you choose to file an amended return for 2016 or claim your losses on your 2017 tax return, the IRS says to write your state and the hurricane(s) you are claiming casualties from at the top of your return, such as “Texas, Hurricane Harvey.”