In a hurricane season with levels of damage much unlike we’ve seen before, home and business owners in affected areas have taken the fall. Aid is on the way from both state and federal levels, which includes legislation. For example, one new law that was passed on September 29 will give tax breaks specifically to the victims of Hurricanes Harvey, Irma, and Maria. You should know the following information if you’ve been affected by one of these storms.
Personal casualty losses refer to the loss of property, whether its value is lowered or the entire item is stolen. These losses can be removed from your federal income tax if the value was reduced due to a natural disaster and your insurance company will not cover the total damages. Vandalism and theft are also considered casualty losses.
Unfortunately, under the old law, these deductions are often not worth the effort of filing for them, as the total amount saved will not be close to what is expected or will be nothing at all. Under the new law, limitations will be laxer so hurricane victims will have larger deductions.
There is more than just personal casualty loss, and for business owners that suffered losses, there are options. You can deduct the full value of what was lost as a business expense on a business’s tax return, or if you are a sole proprietor, on Form 1040. For both personal and business casualty losses, you can claim 2017 losses on 2016 files if you’re in a federally recognized disaster area.
Unfortunately, there are more than deductible losses that can make taxes tricky after a disaster. Anyone with insurance policies meant to cover property after a disaster, including business owners, homeowners, and renters should be cautious of taxable gains.
When an insurance payout is higher than the tax basis of a damaged property, it will be considered “taxable profit”. This is true even in the event an insurance policy does not fully compensate you for the value of the property. This is known as an “involuntary conversion gain”, which, in the event of an insurance payout, turns your property into cash.
People who are faced with an involuntary conversion gain will be required to report it as a taxable income. To opt out, you could choose to make significant expeditures while repairing or replacing the property by making a special deferment. If you decide to take this option, you will only have to report the taxable gain for any insurance money left over.
All money that will be used on repairs or replacements will need to be used within two years of the tax season of the year of the disaster. Any deferred gains will be reduced based on the damage sustained on your property.
When the property in question is a primary residence, then special rules apply to any involuntary conversion gains. If a home is your primary residence—it must be your main home for at least two years leading up to the tax season—then you may be able to use this exclusion to reduce these involuntary conversion gains.
For unmarried homeowners, the limit of the exclusion is $250,000. For married homeowners who are filing jointly, this limit is doubled to $500,000. If after using the gain exclusion tax break you still have a taxable gain, you now have four years instead of two to make sufficient expenditures in repairing or replacing the property in the federally declared natural disaster area. If you do not spend the difference, you will be liable for a taxable involuntary conversion gain.
In the case that a home is rented or non-primary in a disaster area, there will be no taxable gain. You will be free to use the money you get from an insurance payout because the beneficial rule does not apply to a residence that is not owned or primary.
The IRS has announced that 401(k) and other employer-sponsored retirement plans can be used to make loans and hardship distributions to Hurricane Harvey victims and their families.
Before this announcment, anyone younger than 59 and one-half years who chose to make a distribution out of their retirement plan would need to pay a ten-percent early withdrawl fee and pay regular income taxes on the amount. This new law allows eligible victims to take certain amounts out of their retirement plans at any age with no early fee. If you withdraw any money, this new law gives you the option to spread the income over three years, which certain limitations on loans being removed.
Hopefully, these tax tips will help you decide which options will work best for you in the coming months. These tax breaks should be able to help your rebuild, and the money saved will be great during this time. If you need any more assistance, speak with an attorney from Williams Hart.