Look Back in Claiming
Losses from Katrina
As reports of massive property damage from Hurricane Katrina pour in, many taxpayers in the affected areas may be eligible for special tax breaks, including one involving some "backward" thinking.
In the wake of Hurricane Katrina, one of the costliest hurricanes in U.S. history, President Bush has declared storm-ravaged areas, mainly in Louisiana, Mississippi and Alabama, to be federal disaster areas. The president's move gives taxpayers with personal-disaster losses in those areas an unusual choice: They have the option of deducting their 2005 losses on their tax return for 2005, to be filed next year, or on their return for 2004.
If they've already filed their return for 2004, as most people have, they can file an amended return on Form 1040X, available on the Internal Revenue Service Web site (www.irs.gov). Many should consider taking advantage of this option to amend their return for last year because it can result in speedier tax refunds, says Laurie Asch, senior tax analyst at RIA, a Thomson Corp. unit that sells tax information and software to tax professionals.
Yesterday, Liberty Tax Service, based in Virginia Beach, Va., offered to amend free of charge the 2004 tax returns of anyone who suffered casualty losses due to the deadly hurricane. Liberty also says it will be sending advisers to the stricken areas. "Declaring casualty losses can be a confusing process," says John Hewitt, chief executive officer of Liberty, which has more than 1,400 U.S. offices.
But amending your return isn't always the best approach. In some cases, individuals may be better off waiting until next year and claiming their losses on their return for 2005. The answer hinges on such factors as your income, the size of your losses and other factors, says Ms. Asch of RIA. "People need to think about this carefully. It's not as easy as it might look" to figure out which path is best, says Thomas P. Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants in Washington.
For starters, you can't deduct any personal-casualty losses if you claim what's known as the "standard deduction," a flat amount based on your filing status. If you itemize, you first have to reduce your personal-casualty or theft loss by $100 per event when figuring the deduction. Then reduce your total casualty or theft losses by 10% of your adjusted gross income. Because of these limits, very few people can deduct any casualty or theft losses. An IRS publication shows fewer than 94,000 individual income-tax returns claimed casualty or theft-loss deductions for 2002.
But storm damage from Hurricane Katrina has been so big that many people likely will qualify to deduct their losses. So be sure to keep good records. For example, consider photographing evidence of damage, says Mr. Ochsenschlager.
Yesterday afternoon, the IRS announced special relief measures for Hurricane Katrina victims. For example, taxpayers in affected areas generally will have until Oct. 31 of this year to file tax returns and send tax payments. The IRS said it will "abate interest and any late-filing or late-payment penalties that would otherwise apply." A spokesman said this relief includes the Sept. 15 due date for estimated taxes. The IRS said the disaster areas designated for individuals to receive relief include 31 Louisiana parishes, 15 Mississippi counties and three Alabama counties.
Some tax legislation in recent years has made it easier for people to receive various forms of disaster assistance tax-free. See IRS Publication 547, which also summarizes rules for business losses. Also see a publication to be issued soon by the AICPA (www.aicpa.org). IRS Publication 2194 ("2004 Disaster Losses Kit for Individuals") includes Publication 547 and other material. Also check out the Federal Emergency Management Agency's site (www.fema.gov), which includes a list of 2005 federal disaster declarations.
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NOTABLE & QUOTABLE: The alternative minimum tax is "a perfect example of everything that is wrong with our tax system," says former Sen. Connie Mack, chairman of President Bush's advisory panel on federal tax reform.
The AMT "is unfair, complicated and does not promote growth," he says. The tax has "evolved from a targeted provision aimed at a handful of high-income taxpayers who were avoiding paying tax to become a significant hardship to millions of middle-class families."
The Bush panel has reached a consensus to eliminate the AMT, he says.
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BRIEFS: The cost of frivolity: A Tax Court judge imposed a $15,000 penalty on a Texan who had argued, among other things, that the filing of income-tax returns is voluntary and that no part of the tax code requires filing a return or paying income tax. The court described this position as "frivolous and groundless." ... President Bush's tax panel has received more than 15,200 comments from the public, including more than 10,000 mass mailings, says Tara Bradshaw, a spokeswoman. ... The IRS has released a draft of its new federal estate-tax form for 2005. Form 706 is available on the IRS Web site.
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