Financial Recovery After A Tax Disaster

Financial Recovery After A Tax Disaster Related Information:

Contrary to popular belief, the IRS is not always out to get you. Most people think of the IRS as something that is to be avoided at all costs. While that may be true most of the time, when disaster strikes, you may change your opinion. Unfortunately, no matter how well you are prepared for a disaster (assuming you can prepare for such things at all), it can have a lot of repercussions, financial being one of them. Often there is a lot of relief in disaster situations, and here’s where the IRS too lends a helping hand.

If you have suffered financial losses due to a disaster, man-made or natural, then you may be entitled to certain tax breaks from the IRS. There are special provisions under the IRS tax laws, which provide relief to disaster victims and aim to give them some financial relief so that they can get back on their feet.

To qualify for the tax benefits for disasters, the following conditions must be met:

• You should have suffered some casualty losses. Casualty losses refer to any loss, destruction, or damage to any property due to circumstances that were unexpected, sudden, and unforeseen.
• Examples of such circumstances are floods, fires, hurricanes, tornadoes, earthquakes (natural disasters) and vandalism, theft, burglary, etc. (man-made disasters).

If you have suffered due to any of the above mentioned casualty losses, and if your region has been declared as a tax disaster area by the President, then you can get help from the IRS for financial recovery.

Usually, when you itemize deductions, you have to wait a considerable length of time to receive any refunds. But when you itemize your losses from a disaster, especially losses to your home, car, or business, then the waiting period for your refund is greatly reduced. You have the option to deduct your casualty losses from the return filed for the year preceding the year in which the disaster took place.

The IRS allows you to file an amended return to deduct your losses due to disasters. If the amount of standard deduction or itemized deductions is lower than your casualty losses, then refilling an amended return can help you to get more in refunds from the IRS. On the basis of this amended return, you are given a refund immediately, and these funds can then be used to aid the process of financial recovery.

Determining Damage Due To Disasters

If the disaster does not damage your property totally but only partially, you have to figure out the casualty loss by determining to what extent the market value of the damaged property has decreased after the disaster. Compare the decreased value to the adjusted basis of the property in question. Minus any insurance or other payments you might receive, from the lesser of the two amounts (decreased market value and adjusted basis), and this will be the amount of your casualty loss.

For property or businesses that have been completely destroyed due to disaster, the casualty loss will be determined by subtracting any insurance proceeds or salvage proceeds from the adjusted basis of the property.

If any destroyed property was used for personal reasons, you need to make further adjustments to determine the casualty loss. One hundred dollars has to be subtracted from your casualty loss (as determined above) for each casualty event in the year. Then the total of all casualty losses put together (for personal use property) has to be further reduced by 10% of your Adjusted Gross Income. The figure reached will be your total casualty loss due to disaster.

Once you have determined your casualty losses, you can choose to file an amended return for the previous year’s return, or deduct your casualty losses from next year’s tax return. Which way you choose to go will depend on your specific circumstances as regards to amount of damage, tax benefits, and recovery needs.

Although financial recovery after a tax disaster is not easy, you can use the tax provisions set forth by the IRS to try and minimize your losses and hasten your financial recovery.