DOES THE 10% FEDERAL DISASTER EXCLUSION ONLY APPLY TO PRINCIPAL RESIDENCE?

DOES THE 10% FEDERAL DISASTER EXCLUSION ONLY APPLY TO PRINCIPAL RESIDENCE?

(A question asked recently of this blog)

The Tax Code treats personal disaster losses differently from disaster losses attributable to business and investment property. The tax deduction for a personal disaster loss is reported originally on Form 4684 page 1, which is carried to Schedule A of Form 1040. If the personal loss is in excess of the amount that can be absorbed on the return for the year it is originally claimed, the unused amount is treated as a Net Operating Loss like any other ordinary Net Operating Loss. For business and investment losses, the deduction is reported on page one for Form 1040 for individual taxpayers, ((originating on Form 4684, page 2, carried to Form 4767 and then page 1 of Form 1040).

For all losses that are reported on Form 4684, page 1 (personal losses), after computing the basic loss attributable to each category on Form 4684, there are two limitations. The first limitation is $100 that is applied to each casualty / theft loss incident for the year, not necessarily each category of assets reported on the Form 4684. If your home was damaged along with the contents and a vehicle in the same loss event, each category would be reported in separate columns on Form 4684, but they are all one loss and therefore only one $100 limitation is applied. If you had two separate losses during the year, then there would be $200 of limitations applied.

There is one more limitation that is applied to personal losses. The loss on Form 4684, page 1 (personal losses), is reduced by 10% of Adjusted Gross Income (AGI). AGI is the number at the bottom of page 1 of form 1040. For high income taxpayers, this adjustment can eliminate any deduction.

Recently, I spoke to taxpayers who had two losses in Super Storm Sandy. They had major damage to their personal residence and a rental property. Assuming that they computed a loss for both properties, the rental property loss on page 2 of Form 4684, goes to Form 4797 and then to page 1 of Form 1040. The personal loss is reported on Page 1 of Form 4684. Interestingly, since the rental loss goes to page 1 of Form 1040, it reduces the AGI which will affect the deductible amount of the personal loss reported on page 1 of Form 4684.

There is no difference between the 10% of AGI adjustment that is applied for disaster losses and other casualty / theft losses.

Several years ago Congress passed a number of special rules for specific disasters during a two year period. The way Congress paid for the special rules was by increasing the $100 limitation to $500, but for the specified losses the 10% of AGI reduction was eliminated. That is the only time that the 10% of AGI adjustment has been eliminated.

This blog, “AccountantForDisasterRecovery.com” has been addressing taxpayer income tax issues related to catastrophic losses for more than five years.

All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.

	JOHN TRAPANI
	Certified Public Accountant
	2975 E. Hillcrest Drive #403
	Thousand Oaks, CA 91362
	(805) 497-4411
	Contact us through our website at:
	www.trapanicpa.com/contact/
	Blog: www.AccountantForDisasteRrecovery.com
	It All Adds Up For You

This material was contributed by John Trapani. A Certified Public Accountant who has assisted taxpayers since 1976, in analyzing and reporting transactions of the type covered in this material.  

Internal Revenue Service Circular 230 Disclosure

This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities

The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.

This material was completed on the date of the posting

© 2013, John Trapani, CPA,

FORM 1099 REPORTING FOR PROPERTY INSURANCE PROCEEDS?

FORM 1099 REPORTING FOR PROPERTY INSURANCE PROCEEDS?

(A question asked recently of this blog)

Here is a question that should not be asked. Why? Well it implies that the taxpayer who asked the question is weighing the possibility of not reporting on a tax return the insurance proceeds that were received in connection with a disaster loss claim. I know from personal experience that after a major loss people are angry, confused and in a state of psychological shock. I have seen it a number of times and so the question may have been the result of that anger, confusion and in a state of psychological shock.

Generally, I have never seen an insurance company, in normal claim processing circumstances of settling a casualty insurance claim issue a Form 1099. What that does mean is that the insured must keep excellent records of all the claims and payments made by the insurance company. In a disaster situation the tax reporting that is necessary has three possibilities that are discussed elsewhere on this site. Suffice it to say that it is possible that some insurance proceeds must be acknowledged in a tax return, not necessarily as taxable income. Others are recommended to be noted in a return for the year they are received.

It is hard for most taxpayers to accept that while the Internal Revenue Code is basically designed to collect taxes, this area of the tax law is structured to help taxpayers recover from these catastrophic events. The tax laws are not a replacement for insurance, but they are designed to stay out of the way as taxpayers who have been disastered recover from the major loss that they have experienced.

One last thought: One of the reasons ask the question about 1099s in these cases is that they are considering not properly reporting the proceeds. While the tax code in this area is full of what I refer to as “carrots.” That does not mean that there are no “sticks.” If the insurance proceeds that should be acknowledged in a tax return are left off, then the normal three year period for reporting the receipt does not start to run; this is call the statute of limitations. If the proceeds are not reported the three year statute of limitations does not start to run. In other words the return remains open for examination.

Your specific situation should be discussed with a knowledgeable tax professional before taking on the responsibility of filing a return for a disaster loss.

This blog, “AccountantForDisasterRecovery.com” has been addressing taxpayer income tax issues related to catastrophic losses for more than five years.

All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.

	JOHN TRAPANI
	Certified Public Accountant
	2975 E. Hillcrest Drive #403
	Thousand Oaks, CA 91362
	(805) 497-4411
	Contact us through our website at:
	www.trapanicpa.com/contact/
	Blog: www.AccountantForDisasteRrecovery.com
	It All Adds Up For You

This material was contributed by John Trapani. A Certified Public Accountant who has assisted taxpayers since 1976, in analyzing and reporting transactions of the type covered in this material.  

Internal Revenue Service Circular 230 Disclosure

This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities

The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.

This material was completed on the date of the posting

© 2013, John Trapani, CPA,

DO CASUALTY LOSSES TRIGGER AN IRS AUDIT?

DO CASUALTY LOSSES TRIGGER AN IRS AUDIT?

(A question asked recently of this blog)

The short answer: No one can tell you one way or another. There are people inside the IRS who can tell you an accurate answer, but they will not tell anyone.

Let me tell you a story – it is an old story and therefore not necessarily relevant to today, but it does say something about how the agency sometimes reacts to situations.

A client was being audited by the IRS. It was a field audit, meaning the auditor came to my office and went over the client’s records in great detail. The audit took several days. As a result of the extended time that the auditor was in my office, I had the opportunity to engage him in conversation of a nature that did not always relate to the specifics of the case he was examining. It was several years after the Northridge Earthquake of January 17, 1994.

During one of our conversations the IRS auditor told me that he had recently had a short time period where he was basically unassigned to a case. During this time he was sent downtown to the main local office where he was given the task of reviewing tax returns for audit. The computer had made selections based on a proprietary scoring of the returns. His job was to use his human experience and knowledge that had still not been computerized and determine if the returns should be audited or sent back without further scrutiny. So there would be two piles, “audit” or “don’t audit.” But wait, it turns out there was a third pile. Apparently the computer would score a tax return with a casualty loss deduction for further analysis by a human such as this experienced IRS auditor. He told me that if any of the returns had deductions related to the Northridge Earthquake he was to put those in a third pile. Now he did not know what would be done with those Northridge Earthquake casualty loss returns, but he assumed they would be sent back to the file room, never to be seen again.

Then there was another time that was in the local IRS office on an office audit. In this office the examiners have cubicles which are only semi-private. I could not tell who was in the next cubicle, but I could hear generalities of the conversation. The examination was of a Northridge Earthquake loss. So apparently some returns were being audited.

Finally, in my ongoing review of tax cases that taxpayers take to the courts when they disagree with the IRS audit results, there are many that involve disasters and the proper reporting of losses and insurance proceeds.

My personal experience is that providing proper disclosure in a tax return always reduces the chances of examination. The computer makes overall evaluations, but when that human looks over the return and is able to see that all looks fairly reasonable on its face, I believe that reduces the possibility of the auditor placing the return in the “audit” pile.

I want to believe that the IRS has gotten more sophisticated and may now look at returns in a different way. For instance, do they look at all the returns from a specific Zip code and look for the deductions that are likely to be out of the ordinary. The extraordinary casualty loss does not necessarily mean that it is incorrect, but it might garner additional attention. When preparing the return for filing, there is no way of knowing what the neighbors reported on their returns.

One thing that I am certain of is that a taxpayer who has a loss that is properly supported and documented should not be intimidated by the possibility of an IRS audit. If the loss is not claimed on the correct tax return where it should be claimed can be a problem. Using the appraisal method and not including the appraisals is a problem. If the appraisals do not meet the standards required by the IRs, that will be a problem.

This is certainly one of the situations where you go cheap on the preparation, it is likely that you are risking an expensive audit. Your specific situation should be discussed with a knowledgeable tax professional before taking on the responsibility of filing a return for a disaster loss.

This blog, “AccountantForDisasterRecovery.com” has been addressing taxpayer income tax issues related to catastrophic losses for more than five years.

All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.

	JOHN TRAPANI
	Certified Public Accountant
	2975 E. Hillcrest Drive #403
	Thousand Oaks, CA 91362
	(805) 497-4411
	Contact us through our website at:
	www.trapanicpa.com/contact/
	Blog: www.AccountantForDisasteRrecovery.com
	It All Adds Up For You

This material was contributed by John Trapani. A Certified Public Accountant who has assisted taxpayers since 1976, in analyzing and reporting transactions of the type covered in this material.  

Internal Revenue Service Circular 230 Disclosure

This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities

The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.

This material was completed on the date of the posting

© 2013, John Trapani, CPA,