In light of the devastating flooding in Houston, we provide this special report on the tax implications of disasters.
When a “federally declared disaster area” is established, disaster relief payments from the Red Cross, churches or neighbors are excluded from gross income. This includes money for necessary personal expenses, family expenses, living expenses, funeral expenses, food, medical supplies, as well as housing or transportation expenses and repairs to a personal residence not covered by insurance.
If you lose your tax return, you may file IRS Form 4506 to request a copy of your prior year’s tax return. In this instance, writing “Houston Flood” on top of the form expedites the process and waives the $50 fee. You also can request IRS transcripts for the previous three years at no cost.
Individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes for the Sept. 15, 2017 and Jan. 16, 2018 quarterly estimated tax payments deadlines. This includes 2016 income tax returns extended until Oct. 16, 2017 but not the tax payments which were due on April 18, 2017.
The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area.
If you’re located in a federally declared disaster area, you may be spared from penalties for not paying estimated taxes in a timely manner; and, the IRS may abate interest for the related window of time.
Taxpayers can deduct travel expenses if forced to temporarily reside and work in another area as long as they expect to return to the affected area within one year. If your employer relocates to another location due to natural disaster, you can deduct costs associated with temporary relocation, including travel to and from the temporary workplace, 50% of meals and any overnight lodging required. There may also be a casualty loss, which is the lesser of the adjusted basis of the property or the decrease in fair market value (FMV) due to the casualty reduced by the insurance proceeds.
The tax deduction amount must be reduced by 10% of adjusted gross income and $100. A casualty loss is taken as a miscellaneous itemized deduction if property is destroyed, and you receive other property or insurance payment any taxable gain to be deferred. The old property must normally be replaced within two years of the involuntary conversion but you have four years if it’s in a federally declared disaster area. These expenses are taken as a miscellaneous itemized deduction on Schedule A of Form 1040.
On the humanitarian side of this disaster, Houston football player J.J. Watts started a YouCaring fundraiser for victims of Hurricane Harvey ( www.YouCaring.com/JJWatt ) which has currently raised over $6.5 million from more than 70,000 donors.