In the wake of Hurricane Ian, many North Carolina residents suffered damage to their homes, businesses and personal property. Often insurance claims do not fully compensate for all the losses. This can leave many, especially those in debt with the IRS, in a difficult financial position.
A disaster loss is a loss that is attributable to a federally declared disaster. Examples of these types of disasters invoking disaster tax relief include hurricanes, tornadoes, floods, earthquakes, and wildfires.
Fortunately, there are some disaster tax relief measures implemented by the IRS to alleviate some of these issues. First, when there is a federally declared disaster, the IRS postpones tax filing and payment deadlines for affected taxpayers. The extensions usually apply to a wide variety of tax filings and payments, including estimated income tax payments.
An affected taxpayer is an individual, business entity or shareholder in an S corporation. A taxpayer does not have to be located in the federally declared disaster area to qualify as an “affected taxpayer” for disaster tax relief. The records needed to make a timely filing or payment can be in the area instead of the taxpayer.
Another type of disaster tax relief offered is the casualty loss deduction for damages incurred. Generally, the deduction is equal to either the property’s adjusted basis or decreased value, whichever amount is less, minus any insurance proceeds received. The damage must be a result of the federally declared disaster. FEMA lists out the declared disasters each year on its website.
If you receive insurance proceeds, you must subtract those proceeds from the amount of the calculated loss. You cannot claim the standard deduction when you choose to use the casualty loss deduction as a form of disaster tax relief. You must itemize your deductions. You must claim the deduction in the tax year that the loss occurs or you can opt to amend your prior year return to claim it for that year. Choose the tax year that is most advantageous to you.
A few other items to note for those who are in tax debt or under an installment plan:
- The IRS will not abate interest on balances due on liabilities for prior years. They will consider waiving late payment penalties when the reason for the late payment is related to the natural disaster.
- Installment agreement payments due during the disaster relief period are suspended. After the postponement period, payments will be due again, but no fee incurred.
We hope you weathered the storm well, but if you incurred damages and need more information on disaster tax relief or how this impacts your current tax debts, contact the attorneys at Murray Moyer, PLLC. You can reach us by calling (919) 846-6779.
Written by Michael Murray on October 19, 2022.