Taxes are the last thing people in Houston are worrying about right now, but when the rains of Hurricane Harvey finally stop and the cleanup begins, it might be worth thinking ahead to Tax Day.
Insurance, of course, will cover many of the losses people experience. But where there are holes in coverage, some people might hope to make it up with a significant tax deduction. Many of those catastrophic losses won’t have the expected impact when victims file their 2017 returns, though, unless big changes are made in the tax law.
Casualty loss deductions, such as damages suffered during a hurricane, carry their own set of rules with the Internal Revenue Service, says Stephen Kirkland, CPA and founder of Atlantic Executive Consulting. They get complex quickly, but at the core, people will need appraisals of a property’s worth before and after the flooding. And, in many cases, the most recent appraisal for homes is when they were purchased.
“If you paid $100,000 for your house and it becomes worth $400,000 [due to market increases in your area], then it get destroyed by the hurricane, then your loss is only worth $100,000,” he says. “You’re limited to your basis.”
“You only [can deduct] what you put in, not what you could have gotten,” adds Jaye Calhoun, a partner in the New Orleans office of Kean Miller.
Worse still, deductions for lost items (such as appliances, furniture, cars, and personal belongings) need to be made separately for each item. So, for instance, if victims plan to file a casualty loss on a dining room, they’ll need to determine the market value of that table, then repeat the process for the chairs, the sideboard, the light fixture, etc.
Evacuation costs? Those aren’t deductible. And there’s no credit for loss of things with sentimental value.
“It’s a tremendous inconvenience to [a] family,” says Kirkland. “You spend hours cleaning up the mess, evacuating, dealing with tax laws, all that time is wasted since time losses are [also] not deductible.”
It could be even worse for farmers. When Hurricane Matthew blew through South Carolina, timber owners were hit especially hard. While millions in value was wiped out, the basis value of their crops was what they originally paid for each tree.
That worked out to roughly a dime each, says Kirkland.
One advantage, Calhoun notes: The IRS typically extends filing deadlines for people affected areas.
