Recovery from the devastating hit of Hurricane Harvey will take years. Federal tax relief is a big part of helping those in the affected areas rebuild – here is what you need to know.
The aftermath of Hurricane Harvey is all over the news and will likely stay there. Parts of Texas have been devastated by this unprecedented storm, and it will take years to get us back to normal.
As Texans brace for digging through the rubble and rebuilding their lives, taxes are probably the last thing on anyone’s mind. And yet, it is critically important to take a little time now and set yourself up for being able to get the federal relief that you are entitled to. Here is what you need to know.
Deal with insurance first.
A recent news release from the IRS declared that individuals who reside or have a business in Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria, and Wharton Counties may qualify for tax relief.
Part of the tax relief is a casualty loss deduction that affected individuals can claim on their tax return. It is important to understand that the casualty loss deduction is not the same as a dollar-for-dollar reimbursement of what the disaster cost you. There are complex formulas, thresholds and rules to calculate the amount of the deduction. In the end, the benefit is your ability to lower your taxable income (resulting in a lower tax liability).
Remember also that losses covered by insurance cannot be deducted as casualty losses on your tax return. So, you must file the necessary documents with your insurance company first. There is a temptation to wait until you know all the details, have had a chance to assess the damage and come up with a game plan, but don’t wait. Without knowing what your policies will cover, you don’t have the information you need to get the tax benefit.
Some home owners may have multiple policies to sort out (potentially homeowner’s insurance, flood and windstorm). If you have not had a chance to grab a copy of your policy as you rushed out the door (many didn’t!) start with your local relief center that can connect you with your insurance agent. The precise details of who covers what will get sorted later; for now, focus on simply contacting all agents to get the process started.
Choose your timing.
Harvey is a federally declared disaster zone, so you can choose when to claim the casualty losses you have incurred.
Your choice is to claim the casualty losses for tax year 2017 or to amend the 2016 return (which in many cases will produce a refund). Either way, the federal declaration of disaster area means that your return and the resulting tax relief will be expedited.
Deadlines may be affected.
The IRS may postpone deadlines for installment and estimated tax payments, business payroll taxes and returns. For example, certain deadlines falling on or after Aug. 23, 2017 and before Jan. 31, 2018, are granted additional time to file through Jan. 31, 2018. This will help individuals who had extensions to file on October 16th, estimated income tax payments that were due September 15th and January 16th, as well as businesses with quarterly payroll and excise tax payments due on October 31st. The IRS will identify individuals who reside and have businesses in the affected areas and apply extensions automatically, so there is no need to request them.
Document, document, document.
I know that Texans are working tirelessly around the clock to get basic needs met and help those less fortunate. It may be difficult to stop and remember that you need to document the chaos around you, but photos or videos of damage can help you establish property valuations later on. Receipts, invoices and copies of cancelled checks should go in an envelope or a file folder for insurance and tax filing.
Also, keep track of payments you get from insurance companies and FEMA (or other government agencies) to properly exclude them from income. There is no specific requirement for documentation of money spent or relief received, so any record that captures the date of the payment, its amount and purpose, and the payee will be sufficient.
Finally, be sure to contact your mortgage company, credit card and utility companies to notify them of your situation and ask if they could extend a grace period, lower or temporarily suspend your payments, or grant some other kind of relief as you pick up the pieces.