The recent devastation to Davidson, Putnam, and Wilson counties in Tennessee served as a tragic reminder of the loss that can occur when disaster strikes. The three Middle Tennessee counties were recently declared federal disaster areas after deadly tornadoes caused massive destruction across the region on March 3, 2020. Residents in these counties who were affected by the severe weather are now eligible for federal aid through the Federal Emergency Management Agency (FEMA).
In addition to the FEMA aid that is now available, taxpayers can claim casualty losses for damage incurred as a result of the disaster. The IRS has also extended tax deadlines for individuals and businesses in the federal disaster zones and any localities that may be added.
When Are the Tax Deadlines?
For affected taxpayers residing in the three county area, the new deadline for tax returns typically due March 15 or April 15 will be July 15, 2020. Payment of quarterly estimated income taxes and the filing deadline for quarterly payroll and excise tax returns has also been extended to July 15. Tax-exempt organizations will also have until July 15 to file returns normally due on May 15.
Eligible taxpayers do not need to apply for the deadline extension. The IRS will automatically provide the tax relief to anyone with an address on record within the disaster zone.
What Are Casualty Losses?
According to the 2017 Tax Cuts and Jobs Act (TCJA), casualty losses can only be claimed as tax deductions when attributable to a federally declared disaster occurring between January 1, 2018 and December 31, 2025. Damages include casualty or theft of personal-use property and must be permanent, not a temporary decline in value. The IRS defines a casualty as, “the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event, such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption.” As such, the damage incurred as a result of the Middle Tennessee tornadoes would qualify as a casualty and can be claimed as a deduction.
How is loss determined?
The loss is usually determined by an appraisal process. A common misconception is that the loss incurred is equal to the monetary cost of repairing the damage, but the loss is actually calculated based on the difference in fair market value (FMV) of the property or structure before the loss event and the FMV immediately after the loss-inducing event. Insurance and other reimbursements reduce the deductible loss.
How can the loss be claimed?
- Those affected can claim casualty losses on the 2019 or 2020 tax return. Claiming the deduction on the 2019 tax returns can be a real benefit in helping with the costs to rebuild.
- Taxpayers who have already filed 2019 tax returns should file an amended return.
- Taxpayers who have not yet filed will have until the extended July 15 deadline to file 2019 returns and claim the deductions and possible tax refund.
- According to the IRS, anyone claiming the disaster relief deduction should include the FEMA declaration number—4476— on the return.
Any loss is devastating, but help is available. Our tax professionals can answer questions and help you walk through the steps needed to claim available deductions.
Jason Hamilton, CPA also contributed to this article.
