Tax Breaks For Southern California Wildfire Victims

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While the Southern California wildfires have forever altered the lives of those residents who lost their homes and possessions, special tax rules may soften the devastating financial blow experienced by these fire victims.

Taxpayers sustaining any loss should first contact their insurer, as well as federal and state agencies to secure all available assistance and funds.

Even those taxpayers with insurance coverage can expect a shortfall in covering the full value of their property losses. This shortfall is due to policy deductibles, gaps in covering full replacement value of residence and personal assets, and other policy exclusions.

Thankfully, both federal and California tax law provide numerous tax breaks for victims of natural disasters, including fires. As a result of the designation of Los Angeles, San Bernardino, San Diego and Ventura counties as federal and California disaster areas by President Bush and Governor Davis, fire victims can avail themselves of some of the most liberal tax breaks in the tax code.

In addition to the availability of government grants and low-interest loans, taxpayers experiencing uninsured or underinsured losses may be eligible for one or more of the following tax breaks:

  • Postponement of various individual and business tax deposits, including income, franchise and sales taxes.
  • Automatic extension of time to file certain tax returns.
  • 4 or 5-year deferral of gain on insurance proceeds attributable to loss of residence.
  • Tax free treatment for insurance reimbursement for home contents.
  • Schedule A loss for the difference between: i) the fair market value of the residence/land and contents BEFORE the fires, and ii) the fair market value of these items AFTER the fires. This loss is limited to your cost/ tax basis in the damaged or destroyed property.

Note: Schedule A losses must exceed $100 plus 10% of the taxpayer’s Adjusted Gross Income (AGI).

  • Deduction of actual business losses to the extent of the decrease in the values of building/ land and/or other business assets destroyed or damaged in the fires. Losses are limited to tax basis in the destroyed property, but are not subject to the 10% AGI limit.
  • Taxpayers can generally claim any of the aforementioned losses in either 2003 or 2002, and to the extent the loss eliminates income in one or both years, the federal losses can be carried back to the two previous tax years, resulting in potential refunds of taxes paid in those years.
  • Claiming the loss in the year with the highest marginal rate will generally produce the largest tax benefit. However, since the personal loss is only deductible to the extent it exceeds $100 and 10% of AGI, consideration must also be given to which year results in the largest deductible loss. Claiming the losses in 2002 via amended returns will generally accelerate the receipt of tax refunds.
  • Taxpayers electing to claim the losses on their 2003 returns should reduce their wage withholdings and/or 4th quarter estimated tax payments for the remainder of the year.

Note that the losses listed above are reduced to the extent of insurance proceeds, Red Cross and similar support payments received (or pending).

Key Tax Forms and Publications:

  • IRS Publication 584 and 584B (Casualty, Disaster and Theft Loss Handbook)
  • IRS Form 4684 (Casualties and Thefts – Personal and Business)
  • IRS Form 8829 (Expenses for Business Use of Your Home) for Schedule C filers
  • IRS Form Schedule A (Itemized Deduction) – claim casualty loss on line 19
  • IRS Form 4506 (Request for Copy or Transcript of Tax Return) to replace lost records
  • IRS Form 1040X (Amended Return) to claim fire loss on 2002 return
  • FTB Form 540X (Amended Return) to claim fire loss on 2002 return

All Forms should be filed with “Disaster-2003 SoCal Fires” written in bold on the face of the form.

The key to ensuring the maximum insurance reimbursement, as well as the largest tax breaks (for the uninsured portion), is careful documentation of the destroyed property’s pre-fire value, original tax basis and post-fire value (generally zero, except for the residence/ land). This can require reconstruction of your records through prior tax returns, credit card statements, cancelled checks or other records obtained from the original seller of the item. Publication 584 contains excellent worksheets.

Additional information and tax forms can be obtained on the IRS (www.irs.gov) and FTB (www.ftb.ca.gov) web sites, or our firm’s website (www.hcvt.com/links.asp), or by calling (800) 829-1040 or (800) 829-4477 for IRS or (800) 852-5711 for FTB.

Please contact Blake Christian at (562) 590-9535 or see our website, www.hcvt.com, for more information.