Don't Mess With Taxes

Tropical Storm Cristobal made landfall Sunday evening in Louisiana. Even though it quickly weakened to a tropical depression, it still is dumping copious amounts of rain across the Pelican State.

The potential for flooding was part of the reason that the White House on Sunday, June 7, issued a federal disaster declaration for Louisiana.

That decision allows the federal government to help pick up some of the state's disaster response costs.

It also will give those who sustained Cristobal-related damages a chance to claim those losses on their taxes.

Major disasters only need apply: Under the Tax Cuts and Jobs Act (TCJA) enacted in late 2017, you can no longer claim casualty and theft losses as itemized deductions unless your they resulted from a federally declared disaster. This claim limitation is in effect through 2025.

However, that was the only change to the tax law that could help storm victims get tax help. The prior rules still apply, the key ones being that you must itemize to get any disaster-related relief and the tax benefits apply to losses not covered by insurance.

If you don't have insurance coverage, or not very much, it could be worth seeking tax help.

Basically, your major disaster losses will increase your tax deduction amount, which should lower any tax due and possibly provide you with much needed tax refund money.

Form 4684 required: To get this tax help, you must file Internal Revenue Service Form 4684, Casualties and Thefts. Yes, the name is still the same, although it is used now for losses that now apply only to major disasters.

You can find details on filling out Form 4684 in my Tax Form Tuesday post earlier this year, but here are few highlights.

Since only major disaster damage claims are eligible, you must include on the form the Federal Emergency Management Agency (FEMA) disaster declaration number. For Tropical Storm Cristobal that's EM-3527.

You'll need to show the value of the property when it was damaged, as well as any insurance reimbursement you may have received.

Like many tax breaks, a disaster loss claim takes into account how much money you make. You must subtract 10 percent of your earnings level from any potential tax claim.

And the IRS doesn't allow double dipping, which is the term for using the same claim twice. That means in determining the amount to deduct for a disaster loss, you must take into account as reimbursements any benefits you received or which you have a reasonable possibility of receiving from federal or state programs to restore your property.

Time shifting for help sooner: People who sustain property losses due to major disasters obviously want to get as much help as quickly as possible. The tax code recognizes this, too.

That's why you have the option in making a major disaster claim of doing so for the tax year in which the disaster occurred or the prior tax year.

Claiming losses for the earlier tax year usually allows folks to get applicable tax relief, which usually is a tax refund, sooner so they can use it to help in their recovery efforts.

In the case of Cristobal claims, affected filers can claim the losses on their 2020 tax returns they file next year, or by claiming them against the 2019 tax year.

Amending might not be needed: Making claim for the prior tax year usually means filing an amended tax return. This year, however, is different.

Since the IRS delayed the 2019 tax return filing deadline until July 15 to accommodate the upheaval from the coronavirus pandemic, it's possible some Cristobal-affected taxpayers have not yet sent in their 2019 Form 1040.

It's also likely that Louisiana taxpayers still waiting to file will get even more time. When major disaster strike near tax deadlines, the IRS typically allows affected individual and businesses more time to complete their impending tax tasks.

Calculate 2019 and 2020 amounts: If you can claim Cristobal losses, you need to consider whether it's more tax advantageous to claim them on your 2019 return or to wait until next year to claim the losses on you 2020 filing.

Yes, having to figure your 2019 taxes and then guess what you might owe Uncle Sam next year while you're still dealing the mess left by Cristobal is not an ideal situation, tax or otherwise. But it's a necessary one to ensure that you get maximum benefit from the major disaster loss claim.

And while, as noted earlier, it's understandable to want to get any tax relief as soon as you can, you need to carefully evaluate your tax circumstances for each year especially in light of COVID-19. The economic impact of the virus could mean that your income in 2020 will be less than last year, meaning you'll have a lower tax bill anyway for this year.

A tax professional or, once coronavirus condition allow, volunteer tax return preparers at Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites can help you make the disaster tax claim call that works best for you.

You also might find these items of interest:

• Hurricane season 2020 early start means it's time to prepare
• IRS and other government resources can help you deal with a natural disaster
• Storm Warnings: A guide to preparing for and recovering from natural disasters

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