The IRS has provided tax relief measures in the wake of the recent hurricanes. Local Georgetown acquaintance and CPA professional Angela Washburn sheds light on those processes.
She has also provided some detailed and helpful insight below on additional remedies related to retirement plan accessibility.
Robert W. Huntley, CFP®, CHFC
Hurricane Tax Relief by Angela Washburn
In the wake of the devastation caused by Hurricane Harvey and the Presidential declaration of federal disaster areas, affected persons have some tax relief measures available to them. This article is not fully inclusive of all tax relief, but will focus on casualty losses and retirement plan withdrawals.
Additional resources are available at IRS.gov and the Texas Society of CPA’s website as follows:
Casualty losses are defined as a loss from a sudden, unexpected or unusual event. These can include catastrophic weather, such as an earthquake or hurricane or a sudden loss such as fire. Casualty losses do not include the gradual deterioration of property over time. To determine whether you qualify for a casualty loss and to calculate the loss, the following action items are necessary:
- Document that you are within the federally declared disaster area. Take photos, keep newspaper articles or other documentation to be able to show how your property was affected.
- The disaster relief provides that a taxpayer may either include the casualty loss on the 2017 tax return OR the 2016 return. Since most taxpayers have already filed their 2016 tax returns, reporting it on the 2016 return would require filing an amended return. However, it is important to look at both years to see which year might have the best tax impact. If your income is consistent year to year, you could go ahead and file a 2016 amendment to get the funds earlier.
- To claim a casualty loss on the tax return, an insurance claim must be made. Be sure to make a claim even if you don’t have flood insurance.
- Casualty losses are calculated as the lessor of the original cost or the change in the market value before the disaster and then after the disaster. An appraisal is typically obtained to substantiate the market value. An alternative to an appraisal is to use the cost of repairs as the loss in value. To do this, the repairs must be necessary to bring the property to the condition before the event, must not be excessive, relate only to damages related to the casualty, and the repairs should not make the value greater than before the casualty.
- Casualty losses are included on Schedule A, Itemized Deductions on your tax return. To get a tax benefit from the losses incurred, you must itemize your deductions.
- To calculate the loss taken on the return, the loss is calculated, then any insurance reimbursement received is deducted from the loss. The loss is further reduced by 10% of your adjusted gross income and a $100 per event is deducted. The remainder is the casualty loss you may take on the tax return.
- Any insurance reimbursement reduces the casualty loss you can claim on your tax return since the portion reimbursed by insurance is not an out of pocket cost.
A common question when considering rebuilding after a disaster is how to cover the costs. Can retirement plan funds be used without penalty?
The IRS has strict guidelines regarding retirement plan withdrawals, and the declaration of a disaster area has not changed these guidelines. Retirement plan distributions are not tax free – any distribution taken is subject to an early withdrawal penalty of 10% (if before age 59 ½) and federal taxes.
However, the administrative rules regarding 401K loans have been loosened making it easier to borrow or take a hardship distribution against your 401K balance. These include:
- To qualify, the taxpayer must live in the declared disaster area and the loan or hardship distribution must be made between August 23, 2017 and January 31, 2018.
- Loans are limited to the lessor of 50% of the vested amount or $50,000.
- Some 401K plan rules will not allow employees to continue pretax contributions to the 401K while the loan is outstanding. Check with your employer.
- Hardship distributions are limited to the employee’s salary deferrals to the plan.
- Hardship distribution rules have been relaxed, and can be taken out to cover costs such as temporary housing, food and clothing. But, remember, these are distributions from the 401K plan and are subject to the early withdrawal penalty and federal taxes.
- Loans or hardship distributions may be taken out by friends or family members even if they are not in the affected area to assist with family member needs.
If you are affected by casualty losses or other damages because of Hurricane Harvey, or other disaster, be sure to consult with your tax advisor for a full explanation of the implications for your circumstances.
Angela Washburn, CPA, LLC
Office: 512-271-6881 X104
Angela Washburn, CPA, LLC is not affiliated with CWM, LLC and Cetera. CWM, LLC and Cetera do not offer Certified Public Accountant services