Spencer Platt / Getty Images file
The Rockaways in New York were hard hit by Superstorm Sandy, and many of the homes were destroyed. Residents will be able to deduct what they lost.
By Cynthia Ramnarace, Reuters
ROCKAWAY BEACH, New York - It's March, and life has yet to return to normal for those of us whose lives were upended by Superstorm Sandy. We are still waiting on insurance settlements and overworked contractors, and trying not to hyperventilate as we see how much Sandy has cost in everything from drywall to new sofas to extra restaurant meals.
There is some consolation: We might be able to recoup some losses at tax time. Residents in areas that suffered through one of the 10 federally declared disaster areas in 2012 can deduct the value of their lost property on their tax returns.
For this reason, the 177,000 people in the Sandy corridor and some 64,000 other storm victims might actually be looking forward to dealing with the Internal Revenue Service this tax season. But get ready, because like all things storm-related, there's going to be lots of paperwork - and tissues - involved.
"It's so emotional," says Judy Strauss, an enrolled agent (IRS-licensed preparer) in Cobleskill, N.Y. "But people just have to take a deep breath and do it. I tell people to keep a piece of paper by the bed. Every time you wake up in the middle of the night and remember something else you've lost, write it down."
Timing your return
If you were in a declared federal disaster area, you can file an amended return for the 2011 tax year and tuck your Sandy losses into that, or you can simply claim them on your 2012 return. (You can find a complete list of the qualifying storms and areas at the FEMA website.)?
"Choose whichever will give you a better tax situation," says David Tolleth, an enrolled agent in Holmdel, N.J. That's typically the year in which your income was lower, because under the IRS formula, the less you earn, the more losses you can deduct.
You may want to file as soon as possible, but wait until your final insurance settlement comes in, so you can properly account for your losses.
"You need to get appraisals," says Tolleth. "You've got to know if you're going to rebuild, and what those expenses will be. And then you need to know how much insurance you're going to get. And if you don't know those things, then you can't file."
You could end up owing money back to the IRS if you claim too many losses prematurely, he said.
If necessary, you can request an extension so your 2012 return won't be due until October 15; you have until then to decide whether you would rather declare your Sandy losses against your 2011 return.
If you've had extensive casualty losses, you might be owed more in refunds than you paid in taxes. In that case, you can apply those extra losses as far back as 2009 or carry them over to future years. A good tax adviser can help you figure out which would save you more.
What is deductible? Answer: Every spoon
Losses that are not reimbursed by insurance can be deducted using IRS Form 4684: Casualties and Thefts. This includes loss of personal property (many flood policies did not cover items such as furniture and clothing) as well as a decrease in the value of your home - something an appraiser would have to calculate.?
You can also deduct items excluded by your flood and homeowner's insurance such as the cost of landscaping improvements, lawn furniture, decks, fences and swimming pools.
Using photographs, receipts or, if necessary, just your memory, make a list of every item lost. Jot down every spoon, dish towel, bottle of makeup and prescription medication. Show the original cost of the item and what it would be worth if you would have tried to sell it the day before the storm.
"Ask yourself, 'What could I sell it for if I sold it on Craigslist?'" says Tolleth.
Include on your list items for which you received only partial insurance reimbursement. For example, if you lost a car in the storm and it was valued at $10,000 but you received only $5,000 from your insurance, you can include the extra $5,000 in your disaster loss statement.
Anything that has been paid for by insurance or FEMA is not deductible, nor is cash that was destroyed in the home. Also, improvements you make to the home during rebuilding cannot be claimed on your return.
"If you had a 1950s kitchen and now you're putting in a 2012 kitchen, you're improving, so you have to go back to what the 1950s one would have cost you to replace," says Strauss.
Less than a full loss
Once you add up everything you've lost, the IRS requires you to do some math to figure out your actual deduction.
For example, let's say your total documented loss, not covered by insurance, was $20,000. Your adjusted gross income was $100,000. First, everyone has to subtract $100 from the $20,000. Consider that a sort of IRS deductible. That leaves you with $19,900. Then you have to subtract 10 percent of your gross income - in this case, $10,000. (That's why choosing to file in the tax year in which your income was lower could save you some money.)
Your casualty deduction will then be $9,900, saving you roughly $2,475 in federal taxes if you're in the 25-percent bracket.
In other discouraging news, you may actually end up with a bigger tax bill than you were expecting anyway. Congress liberalized hardship withdrawals from retirement accounts for Sandy sufferers, but if you withdrew money from your 401(k) or tax-deferred individual retirement account and didn't replace it, you may owe income taxes and a 10 percent penalty on the hardship withdrawal - adding insult to hardship.
Source: http://lifeinc.today.com/_news/2013/03/15/17298652-for-those-hit-by-natural-disasters-in-2012-irs-can-help?lite
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