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Federal Employees News Digest : Dec. 3, 2012
December 3, 2012 Vol. 62, No. 21 7 Visit us on the Internet at www.FederalDaily.com The IRS is providing tax relief for victims of Hurricane Sandy. But victims who are hoping for significant tax savings may be disappointed---and should be aware of potential tax traps. Recently the IRS announced that it will extend the deadline for making the fourth quarter 2012 esti- mated tax payment due Jan. 15, 2013, to Feb. 1, 2013. Hurricane Sandy caused billions of dollars in prop- erty damage. Individuals living in New Jersey, New York and Connecticut lost personal residences, vaca- tion homes and businesses, in addition to personal items such as furniture, cars and trucks. Are any hurricane-related losses deductible on one's income taxes? Any losses are potentially deductible provided they meet the IRS definition of a "casualty" loss. According to the IRS, a "casualty" is a sudden, unexpected or unusual event that results in actual physical damage. IRS Publication 547 provides a list of deductible casualty losses resulting from events such as car acci- dents, earthquakes, fires, floods, hurricanes, tornados and volcanic eruptions. As such, property damages and losses are potentially tax deductible. Another reason they are "potentially" deductible is because certain conditions must be met before a loss can be deducted on one's taxes: (1) a loss amount must be reduced by any insur- ance reimbursement; (2) only the remaining loss after insurance reimbursement that exceeds 10 percent of an individual's adjusted gross income plus $100 is deductible as an itemized deduction on Schedule A; and (3) the amount listed on Schedule A cannot exceed the lower of an individual's adjusted cost basis in the property (original purchase price plus improvements) and its fair market value. Here is an example: James and Serena own a home in Seaside Heights, N.J., that was worth $600,000 before Hurricane Sandy completely flooded the home and damaged its contents. The home was bought for $150,000, with $50,000 worth of improvements. The home's value has dropped to $350,000 with the homeowner insurance policy reimbursing $200,000 for repairs. James and Serena's loss is there- fore limited to $600,000 less $350,000 less $200,000, or $50,000. James and Serena's adjusted gross income for 2012 is estimated to be $120,000; 10 percent of $120,000 is $12,000. This means that the loss is limited to $50,000 less $12,000 plus $100, or $37,900. Since $37,900 is less than $200,000 (the home's cost basis), $37,900 is deductible as a casualty loss. A casualty to the extent covered by insurance will be allowed only if the individual who suffered the casualty loss files an insurance claim in a timely fashion. No casualty loss is allowed to the extent the loss is fully reimbursable. If the reimbursement exceeds the calculated loss, then the individual may have taxable income. The insurance proceeds received or receivable must be accounted for whether they reduce the loss or are includable in taxable income. "Federally declared disaster losses" such as losses caused by Hurricane Sandy receive special tax treat- ment. A federally declared disaster loss is a loss attrib- utable to a disaster occurring in an area subsequently determined by the president of the United States to warrant assistance by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. The Federal Emergency Management Agency website at www.fema.gov allows individuals to search for federally declared disasters by date, state, region or type of disaster. Under Internal Revenue Code (IRC) Section 165(i), property owners whose homes and contents were destroyed or damaged by Hurricane Sandy can deduct a loss for tax year 2011 rather than for 2012. If such an election is made, then the loss is treated as having occurred in 2011. An election to deduct a disaster loss for 2011 is made by filing an amended return for 2011 that clearly shows that such an election is being made. For individuals who suffered losses during 2012 in federally declared disaster areas, amending a 2011 federal income tax return is done by filing Form 1040X and must be done no later than April 16, 2013. For expedited processing, the IRS recommends stating on top of Form 1040X that the refund claimed is due to a federally declared disaster loss. Some considerations when choosing 2011 or 2012 to report a casualty loss resulting from Hurricane Sandy: • Individual’s need for cash. Amending a 2011 income tax return to report a deductible loss could result in an immediate refund rather than reporting the loss on a 2012 tax return and waiting until spring of 2013 to receive the refund. • Adjusted gross income (AGI) during 2011 compared to AGI during 2012. Because of the 10 percent of AGI limitation, a lower AGI could result in a larger deductible loss and therefore a larger tax refund. Federal employees living in other areas of the country besides those affected by Hurricane Sandy that were declared as feder- ally declared disaster areas during 2012---for example, residents of parts of Colorado and New Mexico affected by forest fires earlier in 2012---should be aware of the option to amend their 2011 income taxes in order to benefit from immediate tax savings. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Some tax relief for victims of Hurricane Sandy
Nov. 26, 2012
Dec. 10, 2012