Tax deductions for tornado victims

TULSA, Okla. - After the storm, the damage may be catastrophic, or relatively minor.

In Oklahoma, we tend to focus on any silver lining.

"We're very fortunate," Tammy Sheofee told us the morning after a tornado hit part of Broken Arrow.
 
She's grateful that storm didn't do near the damage as those storms in central Oklahoma.
   
Still, when it's your home, your property, any damage, is bad.
   
And the trauma is just as real, as a tornado bears down on your home and your family.

"We grabbed some shoes, because no one had shoes on, and we headed to our closet under the stairs, and just started praying to Jesus to save us," Tammy says.

And while storm victims across the state are dealing with many more pressing issues right now, both emotional and physical,  there'll come a time when financial planners say they need to think about how the damage they suffered, could reduce how much they'll pay in federal income taxes this year, by being aware of special deductions storm victims can take.

Certified financial planner James Maddux tells us, "We want to take a look at those, and you know anything we can do in terms of trying to reduce the amount of loss that you have, those items are available to us."

So, who qualifies for those deductions, how do they work, and how to you calculate your storm related deductions?

The answers to those questions vary for every storm victim, depending on income and other circumstances, including insurance coverage.

Here's more information from the Oklahoma Society of CPAs on how to determine if you qualify.

If you're affected by a natural disaster, you should be aware of Internal Revenue Service (IRS) rules on casualty losses, as well as other financial considerations.

What qualifies for a deduction?

Under IRS rules, you are allowed to deduct a casualty loss that is the result of a disaster, but some of the related rules serve to significantly whittle down the amount you can deduct. First, consider what is eligible for the deduction. A casualty loss is the damage, destruction or loss of property resulting from an identifiable event that is unexpected, sudden or unusual. Damages from natural disasters, such as floods, tornadoes and earthquakes are casualty losses. Damage to your home or other property caused by something that is not unexpected, sudden or unusual, such as accidental breakage of items under normal conditions, progressive deterioration occurring naturally over time or due to the failure to maintain the property, does not qualify as a casualty loss. If you have suffered a casualty loss to your home, household goods or vehicle due to a disaster, you should be eligible to deduct the amount of that loss on your tax return, less certain required adjustments. (The same is true if you suffer a loss due to a theft.)

How does the deduction work?

According to the IRS, "If your property is personal-use property, or is not completely destroyed, the amount of your casualty or theft loss is the lesser of: The adjusted basis of your property, or the decrease in the fair market value (FMV) as a result of the casualty or theft."

To determine your adjusted basis, you start with the basis of the property. Your basis in the property you buy is usually how much it cost you. You then increase or decrease the property's basis to reflect any improvements you have made to the property or depreciation deductions you have taken for the property. The decrease in the FMV of the property used to determine the casualty loss is the difference between the FMV of the property immediately before the casualty and the FMV of the property immediately after the casualty. The FMV immediately after the casualty frequently will be the salvage value of the property. From the lesser of the adjusted basis of the property or the difference in its FMV, subtract any insurance payment or other reimbursement (like compensation for the loss from a government or employer relief program). This is your casualty loss.

For example, say a tornado heavily damaged a garage that you also use as a laundry room. You have losses on several items that were destroyed-a washer and dryer, hot water heater, furnace and some furnishings-as well as to the garage walls. Your basis in these items-what you originally spent on them-amounts to $10,000. The fair market value of these items was $9,500 before the disaster and $500 after, making the decrease in the FMV $9,000. Because the decrease in the FMV of the items is less than your adjusted basis in them, you must use the decrease in the FMV in your loss calculation. Your insurance covers you for a maximum of $5,000 in damages, leaving you with a $4,000 casualty loss.

Take these final steps in the calculation of the deduction.

Before deducting this personal property casualty loss on your tax return, there are a couple of last steps you must take. First, you must subtract $100 from every casualty or theft loss you report each year. That lowers the example amount to $3,900. More

significant, you must subtract 10 percent of your adjusted gross income from the loss amount to arrive at your final deduction. If your adjusted gross income was, say, $30,000 last year, you would subtract $3,000-10 percent-from your loss amount to arrive at $900 as your allowable deduction. If your adjusted gross income in the example was $39,000 or higher, that 10 percent would wipe out your allowable deduction altogether.

There are other sources of help.

For those seeking additional relief, it's important to be aware that organizations such as the Federal Emergency Management Agency (FEMA), often provide funds and services to those affected by disaster. The agency's guide, "Help after a Disaster ," offers an overview of what's available (www.fema.gov ). In addition, "Disaster Recovery: A Guide to Financial Issues "-a joint project of the American Institute of Certified Public Accountants (AICPA), the American Red Cross and the National Endowment for Financial Education-answers questions on how to minimize the consequences in the first days, weeks and months after a disaster (www.KnowWhatCounts.org ).

 

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