While some may say that tax season in and of itself should be classified as a “federally declared disaster,” the phrase holds more weight this upcoming year as thousands of families have been devastated by the California wildfires and East Coast hurricanes.
Beginning in 2018, the personal casualty and theft loss deduction is restricted to casualty losses incurred in a federally declared disaster area. Additionally, the casualty and theft deduction is only available to those who itemize their deductions, not to those who take the standard deduction.
In the instructions for the 2018 Form 4684 (Casualties and Theft Loss Deductions), the IRS defines a disaster loss as “a loss that occurred in an area determined by the President of the United States to warrant federal disaster assistance and that is attributable to a federally declared disaster. It includes a major disaster or emergency declaration.” A list of federally declared disasters can be found at https://www.fema.gov/Disasters.
There are two tests that must both be passed to qualify for the deduction:
1. A loss must exceed $100 per casualty and,
2. Net total loss must be greater than 10 percent of your AGI (adjusted gross income)
You may still elect to deduct the casualty loss in the first tax year before the tax year in which you incurred the disaster loss. IRS Publication 976 provides information about personal casualty losses resulting from disasters that happened in 2016 and certain 2017 disasters, including Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires.
An exception to the rule limiting the personal casualty and theft loss deduction to losses incurred in a federally declared disaster area applies if you have personal casualty gains for the tax year. In this case, you can reduce your personal casualty gains by any casualty losses that are not attributable to a federally declared disaster. Remaining losses must pass the two tests listed above.
In a recent publication clarifying some of the new tax reform laws (Publication 5307), the IRS touched on how some of the laws enacted in 2018 make it easier for retirement plan participants to access their retirement plan funds. This may allow affected taxpayers to:
· waive the 10% additional tax on early distributions or,
· include a qualified hurricane distribution in income over a 3-year period or,
· repay their distributions to the plan or,
· have expanded loan availability or,
· extend the loan repayment period
We certainly hope neither you nor your loved ones were affected by a disaster last year, however if you were, we have your Six…tax-wise, that is.