Victims of a major disaster are afforded special tax relief, but they must properly document their loss in order to take advantage of it. The amount of your loss is measured by the difference in fair market value of your property immediately before and after the casualty, reduced by any insurance reimbursement. This may mean hiring a professional to perform an appraisal of your property. This is best done as soon as possible and before repairs are performed. You should document all of the damage with photographs. 

While it is best to have a qualified appraisal performed, the IRS has stated that in certain cases the cost of repairs may be used to measure the decline in fair market value. In this situation, the repairs must be to bring the property back to its condition before the casualty. The loss deduction cannot include any costs that are to improve or upgrade the property. When using the "cost of repairs" method to determine the loss, the actual repairs must be performed by the due date of the return including extensions. If the repairs have not been made, the IRS states that the taxpayer should file their return without the loss included and amend it after the repairs have been completed.

There are situations where the "cost of repairs" method should not be used to determine the amount of a casualty loss. For example, if you have lost valuable trees that are significant to your property, your loss may be more than the cost to remove the debris. In this case it is necessary to provide the appraiser with before and after pictures to include in his report so that the true loss is documented.

Victims in a federally declared disaster area are given the special ability to elect to deduct their loss in the year prior to the year the loss occurred so that they can receive their tax refund sooner. This will require filing an amended tax return. The casualty loss deduction is claimed on Form 4684. The instructions to the form contain additional details about casualty losses.

In the aftermath of Storm Sandy, the IRS warns you to be alert for possible scams. While many individuals are interested in helping those in need, others are looking to take advantage of the disaster. Keep the following recommendations in mind:

• Be cautions if anyone contacts you directly to solicit a donation or offers to help you apply for financial assistance.
• Never give out personal information, such as your social security number or credit card numbers.
• Donate to recognized charities. You can check to determine if a charity is legitimate at www.irs.gov
• Be alert to avoid charities that have names similar to national charities.
• Scam artists often purport to have inside information on how to get financial assistance that is not known to the general public. They may start by charging a small fee, but keep requesting additional fees as the application "works through the system". 
• Click here to go to the IRS list of ways to protect yourself from identity theft. 
• The IRS does not initiate contact with taxpayers through email. For more information about phishing and how to report it click here.

For more information visit our new website at www.saybrookcpas.com

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Our five partners have over 150 years of combined professional experience.  We provide accounting, tax and consulting services to individuals, businesses, nonprofit organizations, estates and trusts.  Our services include tax return preparation, software consulting, and compilations, reviews and audits of financial statements.  We have been located in the shoreline community of Old Saybrook, Connecticut for over 50 years.  Feel free to contact us if we can be of service.  We can be reached at 860-388-4451.

 

 

To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.