CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2006
CCH Whole Ball of Tax is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com

Link to special CCH Tax Briefings on key topics from 2005:
 

• Federal Tax Reform Panel Issues Proposals to “Fix America’s Tax System”
  
  
• Katrina Emergency Tax Relief Act of 2005
  
  
• Streamlined Sales Tax Agreement Takes Effect
  
  
• Energy Tax Incentives Act of 2005
  
  
• New Circular 230 Rules of Practice
  
  
• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
  
  
• Gulf Opportunity Zone Act of 2005
  

Deductions Soothe Casualty Losses

(RIVERWOODS, ILL., January, 2006) – As April 15 approaches, thousands of taxpayers can look forward to easing the pain of damaged homes and stolen property with a casualty loss deduction.  Others, who suffered damage or loss to their property as a result of last year’s hurricanes may already have received tax refunds that can help offset those losses, according to CCH, a Wolters Kluwer business and a leading provider of tax and accounting information, software and services (tax.cchgroup.com).

There is a three-tier hierarchy of tax benefits to assuage losses, according to Mark Luscombe, JD, CPA and CCH principal federal tax analyst.

“People who don’t live in presidentially declared disaster areas get help, but not the most help or the quickest,” Luscombe noted. “Those in declared disaster areas, but not in the Hurricane Katrina/Rita/Wilma areas get more help, quicker, while those in the Katrina/Rita/Wilma disaster areas get the most.”

The Casualty Loss Deduction

People whose losses aren’t a result of a presidentially declared disaster have to wait until they file their return for the year in which their loss occurred to get tax relief.  However, if there is an action for reimbursement against another party, or an insurance claim, the year when the taxpayer can claim the deduction may be postponed.

In the case of non-business property, the deduction is limited to losses arising from theft, fire, storm, shipwreck or other casualty, such as tornadoes, hurricanes, earthquakes and abnormal flooding. In addition, after figuring their total non-business losses, taxpayers have to first subtract $100 and then subtract 10 percent of their adjusted gross income to calculate their allowable deduction. So a taxpayer with $50,000 of adjusted gross income who experienced a single $25,000 casualty loss would be able to claim $19,900.  If someone has multiple incidents of loss in a year – say, a flood in April and a tornado in June – the $100 threshold is applied to each incident, while the 10-percent threshold is applied to the total of losses for the year.

“For individuals, this is an itemized deduction, and it will only benefit people whose total itemized deductions are greater than the standard deduction they’re entitled to,” Luscombe said.

Quicker Relief for Disaster Areas

Special rules come into play if losses occur in presidentially declared disaster areas. In this case, a property owner can elect his or her losses in the year immediately before the tax year when the disaster occurs. This allowed taxpayers who suffered losses in last year’s hurricanes for example, to get some quick relief by applying the loss to their 2004 tax bill.  By filing an amended return, they were able to receive a refund of 2004 taxes in 2005.

In addition, taxpayers in a presidentially declared disaster area who receive grants from state programs, charitable organizations or employers to cover medical, transportation or temporary housing expenses do not have to include these grants in gross income. These expenses include:

• Personal, family, living or funeral expenses incurred as a result of the disaster;
• Expenses incurred for the repair or rehabilitation of a personal residence, or for the repair or replacement of its contents to the extent attributable to the qualified disaster; and
• Payments made by a federal, state or local government in connection with the disaster.

Qualified disaster relief payments do not include:

• Payments for any expense compensated for by insurance or otherwise;
• Payments in the nature of income replacement, such as payments to individuals of lost wages;
• Unemployment compensation; and
• Payments in the nature of business income replacement.

In addition to presidentially declared disaster areas, this exclusion from income is also available to victims of a disaster caused by terroristic or military action and other disasters as determined by the federal, state or local authority and the IRS.

“Taxpayers who live in areas most often affected by adverse weather – tornadoes, earthquakes, hurricanes – should be aware that they have a number of important options under the tax law should disaster strike,” said Luscombe.

Extra Help for Katrina, Rita, Wilma Victims

Victims of Hurricanes Katrina, Rita and Wilma are entitled to special help with their casualty losses.  As victims in a presidentially declared disaster area, they were entitled to claim their 2005 losses against their 2004 taxes by filing amended returns.  But in addition, legislation waived the normal $100 and 10 percent of gross income thresholds, making it possible for them to claim the full value of their loss as an itemized deduction.

In addition, victims of these disasters were able to withdraw retirement savings without the usual penalties, and were provided with the opportunity to replenish those withdrawals or pay tax on them over time, part of a wide-ranging set of tax relief and incentive measures aimed at individuals and businesses in the affected areas.

Figuring the Deduction

To qualify for a casualty loss deduction, the taxpayer must prove to the IRS that a loss occurred, and that the loss was caused by a casualty. To support a claim, the property owner needs to provide:

• Proof of the nature of the casualty, when it occurred, and that the loss was a direct result of the casualty;
• In the case of depreciable property, the amount of depreciation allowed or allowable;
• Proof he or she owns the damaged property, or is legally responsible for it;
• The fair market value of non-business property just before and after the loss;
• A description of the damaged property and its location;
• Salvage value of the property;
• The cost or other adjusted basis of the property; and
• Amount of insurance or other compensation received or expected to be received for property damage. This includes the value of repairs, cleanup and disaster relief provided without cost by agencies or others.

Taxpayers may also use the cost of repairs to the damaged property as evidence of the loss of value if they can prove that:

• The repairs are necessary to restore the property to its pre-casualty condition;
• The repairs do not cover more than the damage by the casualty;
• The amount spent for such repairs is not excessive (estimates from several reputable companies are recommended); and
• The repairs do not make the value of the property greater than it was before the loss occurred.

A taxpayer also can claim casualty losses for personal residences rendered unsafe by reason of certain disasters. The following criteria must be met:

• The residence must be in an area designated a “disaster area” by the President;
• The residence must have been rendered unsafe as a residence because of the disaster; and
• The owner is ordered to demolish or relocate the residence by the state or local government 120 days after the “disaster area” has been declared officially.

CCH also urges victims of disasters to consider damage to the property that is an indirect result of the casualty. Destruction of doors, windows, plants and shrubbery are examples.

What’s Not Deductible?

Note that these incidental expenses relating to a casualty are not part of casualty losses:

• Treatment of personal injury;
• Cleanup costs;
• Temporary housing; and
• Car rental.

Although the victims of last year’s hurricanes are not allowed to deduct their costs for temporary housing, they do not have to report the value of temporary housing they receive through their employers as income.  In addition, businesses in the areas can expense 50 percent of cleanup costs that otherwise would have to be capitalized.

Determining the Value of Property

Valuation of property is of the utmost importance when determining the amount of loss sustained in the casualty. When tax time arrives, taxpayers will need to be prepared to provide their tax preparer with evidence showing the value of the property’s pre-casualty value. Acceptable evidence includes:

• Canceled checks, vouchers, receipts, purchase contracts and deeds.
• If records have been destroyed, an appraiser’s opinion on the value of the property is needed.

Note that these losses claimed for the destruction of portraits, heirlooms, keepsakes, etc. must be related to their market value, not the replacement value or sentimental value.

IRS Resources

Taxpayers claiming a casualty loss should get a copy of IRS Publication 547, Casualties, Disasters and Thefts.  Also useful is IRS Publication 584, Casualty, Disaster and Theft Loss Workbook for individuals.  A similar workbook Publication 584B is used to figure the casualty loss for business and income-producing property.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (tax.cchgroup.com) is a leading provider of tax, audit and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

-- ### --

nb-06-06