When a natural disaster hits, surviving is the priority. However, eventually, natural disaster victims will also have to worry about insurance claims, lost wages and other financial matters, including taxes.
When it comes to taxes, there is some relief available for those left with property damage and lost records due to disasters, such as, wildfires or earthquakes.
1. Consult with your Tax Attorney or Tax Preparer as Soon as You Can and Ask about a Casualty Loss Deduction.
An important tax break for natural disaster victims is the casualty loss deduction for damage to your home, personal assets, and business assets. Generally, the deduction is equal to either the property’s adjusted basis or decreased value, whichever amount is smaller, less insurance proceeds.
If you qualify, decide when to claim the deduction:
You can claim the casualty loss deduction for the tax year that the loss occurs or for the previous tax year. Pick whichever year is more favorable to you. Claiming the deduction on the previous year’s return could mean you get some money back sooner rather than later in the form of a refund of taxes paid on your prior year return. That could make a big difference when you are trying to get back on your feet after a natural disaster.
2. Recover your IRS Tax Records for Free
Reconstructing records after a disaster is an essential task for tax purposes, getting federal assistance, or insurance reimbursement. After a disaster, certain records will be needed to prove your loss. For tax records, the IRS usually waives the fees and expedites requests from disaster victims for copies of previously filed tax returns or return and income summaries.
We recommend that you obtain as many years as possible and then put them in a safe place for future use.
3. Reconstruct Records Relating to Basis
If you have lost your records relating to the Cost Basis of the destroyed property, it is important to immediately begin gathering third party evidence of your investments in the property destroyed. Contact real estate agents, contractors who improved the property, sellers of the property and request copies of the documents related to the transactions. Be sure to keep a list of who contacted and the outcome so that your tax attorney and preparer can utilize that information in the future.
4. Plan for the Future
If you are living or doing business in an area prone to disasters such as wildfires, floods, or earthquakes, it is more than a good idea to plan for the likely disaster. In addition to emergency supplies and provisions, plan for your financial investments and recovery. For instance, make sure certain secure documents such as tax returns, birth certificates, deeds, titles and insurance policies in a waterproof and/or fireproof container. Be sure to give duplicates to a relative or other trusted person who lives in a different town or state. You may also want to upload important documents to a personal and secure Cloud server so you have an electronic copy.
Also, make part of your yearly estate planning review a time to document your personal and business assets/inventory so that you have general notes as to personal and business changes in asset, inventory, and improvements.
Additional disaster related information can be found here:
- Wildfire Tax Tips
- Calculating Gain from Reimbursement for Loss of Personal Use Property Disaster Losses and Gains for Business or Employee Property
- Qualified Disaster Relief Payments: Federal Loans, Charitable Assistance, Etc.
We hope that you do not find yourself needing to know this information. In the event you do, please do not hesitate to contact us.