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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:
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2006 CCH Whole Ball of Tax
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.
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