Financial Recovery After A Tax Disaster

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People endure many different disasters throughout the year. However, when these disasters happen, the tax laws offer some kind of assistance to the loss that the victims face. The President will usually declare a state of disaster and citizens who suffered the disaster can use their damages as expenses when filing their individual taxes.

The IRS allows the taxpayers who file an itemized tax return to deduct casualty losses, which are the damage and loss of property from an unexpected or sudden disaster.

The advantage to this is that the damages that are suffered during a major disaster that the President declares as a federal emergency have a significantly reduced wait time. In these cases, the taxpayers are allowed to deduct the losses suffered in the tax year before the event took place by filing an amended return.

An amended tax return allows the eligible individual to get an immediate tax refund, instead of waiting; this money can be used to fix the damages incurred to their property or find a new place to live. Taxpayers who did not file an itemized tax return might take advantage of an amended tax return in the event of disaster damage.

As soon as the Federal Emergency Management Agency, FEMA, makes the announcement that the President has made a declaration of disaster following a hurricane, tornado, wildfire, flood or other disaster, then federal help begins to take effect. This help may include special tax relief options.

Disaster tax relief usually includes getting extended deadlines for filing your taxes and relaxes the penalties for those individuals and businesses that were affected. The tax relief also extends to those whose tax records are located in the damaged area and any workers who provide relief help to victims.

Some disaster victims might find that even though they have experienced substantial losses, they may not be enough to meet the two tax law limits that are available on casualty claims. One had to reduce the total of all their casualty losses by 10 percent of their adjusted gross income after reducing the amount of the claim by $100. People who had high taxable income the year they were unable to claim the losses and expect a low income the year following the disaster may be able to deduct more of their losses by waiting until they file their return the next year.

If one meets the loss limits, then the process to claim them is the same, no matter which tax year you choose to file the claim. In order to claim disaster losses, one must file the Form 1040 individual tax return, which is considerably long. Then Form 4684 must be filed to figure and report casualty loss and a Schedule A to itemize their loss deduction. How the damage has hurt their property's fair market value is then determined, which is a two-part valuation. The difference between an appraisal for the post-disaster value of the property and the adjusted basis is the loss from the casualty. While filing an amended return, it's important to explain that the refiling is because of casualty losses that were incurred in a federal disaster. An attached Form 4684 then shows how the loss was figured, and the specific date or dates of the disaster and the state, county, and city where the damage or destroyed property was located during the disaster must be specified.

A tax expert can help people who have had high taxable income before the year of the disaster and will expect a lower income during the year of the disaster to claim more losses in the following year.