After surviving hurricane winds and an ice storm over the course of the past year, the area now adds a major flood to the list of natural disasters that have caught federal attention. On August 14, FEMA declared a federal disaster in Jefferson County, Kentucky, regarding the severe storms and flooding that took place in the Louisville area on August 4. This designation sets in motion a variety of relief mechanisms and financial implications for affected parties.
The National Weather Service reported record-breaking rains in Jefferson County, as well as Floyd and Clark Counties in Indiana on the morning of August 4. Rainfall totals up to six inches fell between 7 a.m. and 10 a.m., especially in central Louisville. In addition to major flooding of homes and businesses, the numerous flooded roads and parking lots caused damage to hundreds of cars.
Many individuals and businesses experienced real financial losses from the flooding. Insurance policies are often lacking in the specific events of flooding, and many vehicles without comprehensive coverage were total losses to their owners.
For personal income tax purposes, casualty loss rules were changed significantly in 2008 for losses occurring in federally declared disasters. These rule changes are in effect for losses in 2008 and 2009, and are often very beneficial to the taxpayer. Under the old law, individuals incurring any casualty losses were only allowed to deduct the amount of the loss as an itemized deduction, and only after reducing the total loss by $100, then further by 10% of the year’s Adjusted Gross Income (AGI). This typically wiped out any potential tax benefit entirely.
The new law applies to federal disasters, and it allows such losses to be claimed even without itemizing deductions, and also eliminates the requirement that the loss be reduced by 10% of AGI. For 2009 losses, the total loss must be reduced by $500, but any remaining loss can be claimed in full by itemizers and users of the standard deduction alike.
Additionally, a federal disaster loss incurred in 2009 can be claimed either on the 2009 tax return, or on an amended return for 2008. This 2008 option can provide a faster refund of the tax benefit, but may not always be the best choice. The taxpayer should consider their overall tax brackets and impacts from claiming the loss on the particular 2008 and 2009 returns and also weigh the timing benefit against the possible fees for preparation of an amended return.
The amount of a personal casualty loss is based on the difference of the fair market value of a property before and after the casualty. Sometimes, this can be determined by the cost of repairs, when the repairs are made only to bring the property back to its pre-loss condition, and certain other factors are present. In a business loss, adjusted basis is used in the determination of the amount of loss. Insurance and other reimbursements must be netted against the loss before claiming any deduction. Note also that incidental costs, such as temporary lodging, car rental, or medical costs, are not allowable as part of a deductible casualty loss.
Besides an income tax deduction, FEMA provides another avenue for relief. Applications for federal payments can be made by calling the agency at 1-800-621-3362, and their website is at www.fema.gov. FEMA notes that if an individual had damage to a personal vehicle that occurred in Jefferson County on August 4, they may qualify for assistance even if that individual does not live in the county. FEMA reimbursements can be made for a variety of expenses which is different from what constitutes a casualty loss for tax purposes, but they do not cover insurance deductibles.
The federal disaster declaration caused the IRS to extend certain deadlines for taxpayers and businesses in the area. Certain filing and payment dates that would have fallen between August 4 and October 5, have been extended to October 5. In qualifying situations, the IRS will also waive their fees for providing copies or transcripts of prior tax returns in the event they were damaged in the flood.
