My heart and prayers go out to those who suffered a loss during the California wildfires. The widespread destruction of life and property saddens us all.
On the positive side, the community came together and with the help of our first responders and because the winds settled down, we avoided what could have been an even more horrific disaster. My thanks go out to the forces that fought the blaze and to those who volunteered in helping others.
There is a bit of comfort on the financial side to those who suffered a loss. Casualty losses such as this are allowed as a deduction on your tax return. And the good news is that you can actually amend your prior year income tax return to include the loss and enjoy an immediate refund.
Before you get too excited, one caveat: Trump’s tax reform legislation currently before Congress would eliminate the casualty loss deduction. As it happens with many new tax laws, it may be made retroactive to 2017. This would be unfortunate not only for Californians but for those in Florida and Puerto Rico who suffered losses from the hurricanes.
Because our area has been declared a federal disaster, Congress has extended the due date to file your 2016 income tax return to January 31, 2018. You will not be penalized for filing late. However, if you owe taxes for 2016, you will be penalized for failure to pay. You tax bill is due every year on April 15 whether or not you obtain an extension. However, if you are making quarterly estimated tax payments for the 2017 tax year, you are granted an automatic extension for payment of the January installment (due January 15) to January 31, 2018.
According to the IRS, “a casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.” IRS Publication 584 provides complete details about how to define and report casualty losses. To take the loss you must file Form 4864 in conjunction with either Schedule A, Schedule D, or Schedule L. There’s a lot of math involved. The loss is reduced by insurance reimbursements, then by $100, then by 10% of adjusted gross income. The remainder is the amount you are allowed to deduct on your tax return. If the loss cannot be absorbed in the current tax year, it will become a component of the Net Operating Loss and either carried back or carried forward to future tax years.
You will need to find a way to establish the fair market value of the items lost. Appraisals, before-photos, and purchase receipts can help. You should also document the loss with photographs, police reports, witness reports, and any other information to substantiate the event and to justify the amount taken as a deduction.
Advisory or mandatory evacuation expenses such as lodging, transportation, and storage are not deductible.
In order to take a tax deduction for cash or noncash donations, the contribution must be made to a bona fide charity. You must have a receipt with a description of the noncash donations with reasonable amount (what the items could be sold for in a thrift store) listed. If you make a contribution of monies, you are required to retain an acknowledgement letter from the charity to confirm it. Your cancelled check is not enough support for the deduction. If you donated money and items to an individual or a family, you have created good karma, but you are not allowed a tax deduction.
Hopefully, you retained copies of at least the last four years income tax returns in a safe place. Scanning the returns and the source documents used to compile your income and deductions to the Cloud is an excellent idea. Or keeping these records in a fireproof safe or safe deposit box is also wise. If you had not yet prepared your 2016 income tax return and lost your documents, the IRS has an informative video to help you if you need to Reconstruct Your Records.
It’s wise to consult with a licensed tax professional to discuss the impact of a casualty loss on your tax return. The IRS has also provided additional answers in its Disaster Resource Guide.