For many taxpayers, 2018 was – quite literally – a disaster. The Federal Emergency Management Administration (FEMA) issued a grand total of 124 disaster declarations for the year, from devastating wildfires in California to the deadliest hurricane to hit the East Coast in decades. And, in just the first month of 2019, two more federally declared disasters struck the United States.
Disaster Loss Deductions
Under a tax law change made by the Tax Cuts and Jobs Act (TCJA), personal casualty losses are no longer deductible. However, that tax crackdown does not apply to losses from a federally declared disaster. As under prior law, unreimbursed losses from a federal disaster are deductible to the extent they exceed $100 per casualty or theft, subject to a 10 percent of adjusted gross income deduction floor [IRC Sec. 165(h) as amended by the TCJA].
A disaster loss is generally deducted in the year the disaster occurred. However, a special rule continues to apply in the case of a loss in an area declared by the president to be eligible for federal assistance under the Disaster Relief and Emergency Assistance Act; a list of federal disaster areas is available on the FEMA website. As an alternative to claiming a disaster loss in the year of the disaster, a taxpayer can elect to deduct the loss in the immediately preceding tax year [IRC Sec. 165(i)(1)]. The deduction can be claimed either on the original return for the preceding year or on an amended return. The due date for making the election is six months after the due date for filing the return for the disaster year (determined without regard to any extension of time to file).
Key due date: If a calendar-year taxpayer wants to claim a loss from a 2018 disaster on the 2017 return, the taxpayer must amend the 2017 return by Oct. 15, 2019.
A taxpayer making the election must include a statement on, or with, the return or amended return for the deduction year, indicating that the election is being made. The statement should specify the dates of the disaster and the city, town, county and state where the damaged or destroyed property was located at the time of the disaster.
Pros and cons: Claiming a disaster loss for the year prior to the disaster can result in immediate tax savings and a quick refund that may be sorely needed to assist with disaster recovery. On the other hand, it may pay to wait and claim a deduction on the return for the year of the disaster if the taxpayer will be in a higher bracket for that year. In addition, individual taxpayers must factor in the 10 percent of adjusted gross income (AGI) deduction floor when comparing the value of the loss deduction for each year. If a taxpayer elects to wait and claim the deduction on the return for the year of the casualty, it may be possible to adjust estimated tax payments for the remainder of the year to improve cash flow.
The IRS has authority to extend tax deadlines in the wake of a federally declared disaster for a period of up to one year [IRC Sec. 7508A]. Moreover, the law specifically provides that late filing penalties and interest on underpayments may be waived or abated.
Tax deadlines that may be postponed include:
- Filing returns
- Paying tax
- Making IRA contributions
- Completing IRA or plan rollovers
- Filing a refund or credit claim
- Filing a Tax Court petition or a suit for a refund
An updated IRS Revenue Procedure contains a lengthy list of other tax actions that can be put on hold in the event of a disaster [Rev. Proc. 2018-58].
These deadline extensions do not apply automatically, however. The IRS announces the length and scope of any postponements for each disaster.
Bear in mind that disaster postponements are not limited to individuals and businesses physically located in affected areas. An individual or business whose records are located in a disaster area can also qualify for a deadline extension.
Tax pro tip: Where the IRS has granted a postponement of time to file returns and make payments in response to a federally declared disaster, practitioners located in the covered disaster area who maintain records necessary to meet a filing or payment deadline for taxpayers located outside the disaster area may elect to contact the IRS to identify such clients. A practitioner may contact the IRS at 1-866-562-5227. Alternatively, a practitioner who maintains the records of 10 or more clients located outside the disaster area can submit a bulk request for relief by sending the IRS a CD with identifying information for the affected clients. Get information from the IRS on how to submit a bulk request.
For additional disaster-related resources for you and your clients, visit the IRS Disaster Relief Resource Center for Tax Professionals.