The massive devastation taking place in Southern California has many thinking and preparing for the worst-case scenario. Especially for those of us living in a very arid-wooded area like the Rocky Mountains, near coastal waters & the flood plains, and those that are currently trying to figure out what's next.
The new act eliminates the 10% adjusted gross income adjustment and removes the requirement to itemize on the tax return. That means that the total loss will no longer subject to a 10% reduction of the victim's income. Now, they can effectively claim 100% of their qualified loss as a deduction on the return. In addition, the compensation that victims receive from settlements related to the disaster are tax-free.
Federally declared natural disaster victims are typically granted an automatic extension on their tax return and the time to pay. This means that there is not a penalty imposed for underpayment, and the extension form that normally must be filed to provide an additional 6-months is not required. The relief act recently signed into law allows amended tax returns to be filed up to a year after enactment, instead of being limited to three years after the originally filed return. This has been included to apply to payments received in 2020-2025 for Federal wildfire disasters which occurred after 2021.
Disaster Loss
This type of loss occurs when property is destroyed through disaster, and the amount of coverage provided by insurance is NOT enough to recover the total cost of the loss. If a property owner is under insured or has a bunch of "stuff" then it is likely the cost to replace & rebuild greatly exceeds the amount received through insurance. In that case, the victim experiences a loss. In normal circumstances, disaster losses must be reduced by 10% of your adjusted gross income.
So, if you make $100K and experience a loss, the first $10K of that loss cannot even be taken on your tax return. The newly signed act will allow the victim to NOW claim 100% of the loss on their tax return when the disaster is a part of a federally proclaimed disaster area.
Resources
The IRS Resource Page provides a list of federally declared disasters including a link for other State specific resources for each event that has been declared. Click HERE to learn more about each specific event.
Click HERE: for a link to the newly signed bill.
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