Hurricane Sandy created widespread impact by devastating highly populated areas of the East Coast. When natural disasters strike, the IRS typically creates special rules that tax preparers discover in their annual tax update courses. In addition, the customary rules apply for deduction of property damage losses.
How much of the estimated $20 billion in property damage is deductible by Hurricane Sandy victims depends upon individual circumstances for each of them. Therefore, most cases call for the expertise of a Registered Tax Return Preparer. Every RTRP is familiar with the procedures for identifying and calculating a casualty loss deduction.
Since casualty losses are itemized deductions, only taxpayers who itemize obtain a tax benefit. Many people merely use the standard deduction. However, they can itemize deductions for any particular year regardless of not doing so in past years. Some taxpayers may find that a Hurricane Sandy loss – when combined with other itemized deductions – creates a total that exceeds the standard deduction. Consequently, tax professionals should get ready to utilize their tax preparer training for assisting certain individuals differently than past years.
In fact, tax return preparers are already completing Form 4684 to report Hurricane Sandy losses. This is a result of the IRS extending the deadline for storm victims to file 2011 tax returns. Anyone who had an automatic 6-month extension for filing a 2011 tax return received additional time beyond the October deadline if they lived within the Hurricane Sandy disaster area.
A similar rule learned in every online tax course permits individuals with casualty losses to amend prior year tax returns already filed in the current year. This action allows a disaster victim to claim a casualty loss on the tax return filed in the year of the loss. Hurricane Sandy victims can thus obtain tax refunds now when needing the money for repairs. If they report their losses on 2012 tax returns, they must wait until next year to file and claim the loss deductions.
Taxpayers must gather some exact details in order to claim casualty losses. Tax professionals follow specific procedures from tax CPE courses to properly calculate the deductions. A loss is limited to the lesser of the decrease in property value by the loss event or the owner’s adjusted basis in the property at the time of loss. The tax deduction is then determined from reducing a loss by $100 and 10 percent of the taxpayer’s adjusted gross income. This mathematical exercise can eliminate the deduction for someone with high income relative to a modest loss amount.
Because the basis in an item is usually its original cost, taxpayers cannot deduct a replacement cost that is higher. In addition to revealing their basis in damaged property, taxpayers must also reduce their casualty losses by any insurance proceeds received or expected. As a result, the information from a tax preparer ethics course becomes relevant with casualty loss deductions. For instance, accurate basis figures are required. Plus, an unexpected insurance reimbursement that arises after claiming a casualty loss becomes taxable income for the year received.
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