In the central plains, it’s a tornado. On the east coast, it’s a hurricane. In the Midwest, a flood. In the mountains, an avalanche. On the west coast, an earthquake. Whatever it is, natural disasters strike with little warning and, often, no mercy. And when you’re looking at a damaged or destroyed home and/or livelihood, the last thing you want to think about is paying taxes.
The bad news is you do still have to pay taxes, even if you are hit hard by a natural disaster. But the good news is that the IRS has no interest in holding your feet to the fire. The last thing they want is for people to wind up needing tax debt relief because of an act of nature that was completely out of their control. Believe it or not, the IRS is very much on your side in this situation.
For starters, victims of natural disasters can get quite a bit of extra time to file and pay, whether they’re paying regular or quarterly estimated taxes. Business owners can get extensions on filing payroll returns as well. Any penalties or interest that would be applied to taxes for these people are waived as long as they meet the new/extended deadlines the IRS gives them.
Next, the IRS often allows tax breaks on donations and financial support to natural disaster victims. In particular, organizations can provide financial assistance to their workers tax-free, and nonprofits can do the same without risking their tax-exempt 501(c)3 status. These are, of course, on top of the regular tax laws that allow people to write off their charitable donations to nonprofits that provide disaster relief, and for recipients of donations to accept them tax-free.
Finally and most importantly, the IRS gives a specific deduction to disaster victims called the casualty loss deduction. This tax break allows victims to deduct part of their losses on their tax returns for the year of the disaster. This deduction has some limits to it, it can only apply to disaster-related losses, it only applies to losses past the first 10% of your adjusted gross income plus $100, it doesn’t include insurance or other reimbursements, it doesn’t apply to future or potential income, but in general it can be extremely helpful.
If you’re going to take the casualty loss deduction, make sure that you keep impeccable records of your losses, reimbursements, etc., and fill out Tax Form 4684 and Schedule A with the details of the deduction.
Even with a few days’ warning at most, natural disasters are unexpected and almost impossible to plan for. The IRS knows this, and they won’t leave you with a full tax burden in your hour of need. Just make sure to let them know when you need their relief so they know to give it to you.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.