How to Make Use of Relaxed Rules Under Tax Relief From Hurricanes

In a story on deductions for casualty losses published last week, I explained the usual rules for writing off losses. This time, we’ll talk about law changes that took effect in September.

They boost allowable write-offs for many millions of individuals whose homes, dwellings and other properties were damaged or destroyed last August by Hurricanes Harvey and Irma.

Recall that the usual rules prohibit individuals who use the standard deduction from claiming losses. They must itemize on Form 1040’s Schedule A to claim losses.

Also, there’s a limit on deductions for losses (after they’re reduced for insurance recoveries and $100 for each casualty). They’re allowable only to the extent that their total in any one year exceeds 10 percent of an individual’s adjusted gross income and are deductible only for the year in which they occur.

There are losses that happen in disaster areas that are eligible for federal assistance. Different, more favorable rules apply to those kinds of losses. They allow qualifying individuals to apply their losses to either the occurrence year (2017), or, should that be more advantageous, the previous year (2016)

Here is how the revised rules help hurricane victims. They introduce a minor tweaking that increases the $100 floor to $500. On the plus side, no longer do they bar those who opt for the standard deduction from claiming losses. The big change is that their entire losses are allowable, not just the portion that exceeds 10 percent of AGI.

Tax-trimming tactics when six-figure losses offset five-figure incomes. Under both the old and the new rules, another break becomes available when disaster-related losses exceed income. It behooves qualifying persons to become knowledgeable about the complicated, frequently overlooked rules for personal net operating losses (NOLs) that allow them to apply unused excess deductions to recover or reduce taxes paid in other years. 

They can take unused write-offs as additional deductions for the three prior years and for the following 20 taxable years (so-called carryback and carryforward in agency argot). They also have the option to forego the entire carryback and just carry forward the excess amounts for up to 20 years, unless the excess amounts are used up sooner.

Let’s suppose affluent April Arden abides in a pricy place that’s entirely destroyed by Hurricane Harvey. Like April’s neighbors in their exclusive enclave, her insurance policy specifically omits coverage for hurricanes. Accordingly, her six-figure loss exceeds her five-figure income.

It’s okay, says the IRS, for Alice to apply 2017’s unused excess deduction to reduce taxes for the years 2014 to 2016 or apply them to trim taxes for the next 20 years. The law permits her to avail herself of both options.

My advice to April and others like her is to seek the help of an accountant or other qualified tax professional on how to take maximum advantage of the complicated rules, particularly those for carrybacks and carryforwards.

Subsequent columns will discuss losses in disaster areas that are eligible for federal assistance and deductions for casualty and theft losses must be reduced by insurance settlements.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting). 

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