Tax Breaks for Those with Recent Hurricane Damage
Eileen St. Pierre, The Everyday Financial Planner
A friend of mine whose home suffered damage as a result of Hurricane Harvey recently asked me if there were any tax breaks to help her out. I thought I would share with you the information I passed on to her. Congress actually agreed on something and passed legislation at the end of September giving some tax relief to the victims of Hurricanes Harvey, Irma, and Maria.
Victims of these hurricanes can deduct most of their casualty losses even if they do not itemize.
Normally, you had to do the following to deduct casualty losses:
- First subtract out $100 per casualty.
- Then you could only deduct net casualty losses that exceed 10% of your Adjusted Gross Income (AGI).
- You needed to itemize your expenses on Schedule A. Those who took the standard deduction were not allowed to increase it.
With the new legislation,
- You first need to subtract out $500 per casualty.
- You can then deduct all of the net casualty loss if you suffered damage that was not covered by insurance in these hurricane zones.
- If your net casualty loss exceeds the cost of the property plus improvements or adjustments, you can only deduct the cost of the property plus improvements.
- If you do not itemize, you can add your losses to your standard deduction amount.
- More information is contained in IRS Publication 584.
You can carry back the loss to 2016 to get your refund faster.
If you live in a federally-declared disaster area, you do not have to wait until you file your 2017 return to get a refund. You are allowed to file an amended return (IRS Form 1040X) for the year before the loss occurred. Just remember you cannot file an amended return electronically.
You can use your retirement funds without penalty to help pay for losses.
The 10% early withdrawal penalty is waived if you are a victim of Hurricanes Harvey, Irma, and Maria – normally you have to wait until age 59 ½ to withdraw without penalty. They also are allowing “greater flexibility” in borrowing from your retirement accounts so I would check with your retirement account provider on what this means in practical terms.
I do not recommend you use your retirement funds, whether it is a straight withdrawal or a loan, to pay for hurricane damages. This money is for your retirement. Having to pay back a 401(k) loan or replenish money you have withdrawn can really set your retirement funding plan back. For many, they were already behind to start with!