Hurricanes, tornadoes, floods, wildfires, and other severe weather events are happening more often than ever before. Some states are at higher risk than others, like Texas, California, Florida, and Louisiana, but wherever you live, it pays to be prepared. We can’t reliably advise you on how to safeguard your property or family in the event of a natural disaster, but we can help guide you on what to do with tax planning before and after a disaster strikes.
Financial Preparedness Before a Disaster
Because disasters can happen anywhere and at any time, take steps to prepare ahead of time. The IRS has three excellent recommendations to help you protect financial information.
Create and update an emergency plan Especially if you live in a high-risk area, create an emergency plan for your family, household, or business. The plan should include protective actions to ensure life safety, evacuation plans and procedures, and designating a safe shelter or space. Even if you don’t think you’re at risk for a natural disaster, creating an emergency plan will help all family members know what to do and how to react if there’s a fire, for example. This is an excellent resource.
Make electronic copies of documents While the IRS and your CPA keep records of your tax returns, it’s still a good idea to maintain your own electronic copies. In addition to keeping three years’ worth of tax returns, include bank statements, insurance policies, titles to vehicles, marriage certificates, social security cards, and other legal documents. A good rule of thumb is to back up important data in three places; so if you have paper copies, that means storing your important information on a secure zip drive, external hard drive, CD or DVD, or on the cloud.
Our previous blog post lists what to keep and what to toss when it comes to financial documents.
Record a list of valuables This can be as detailed as a room-by-room description of valuable room contents or as general as one document that notes belongings. Doing this ahead of time makes it easier to file insurance claims and tax benefits if a disaster strikes. Remember that homeowners’ insurance doesn’t cover everything; wedding rings, for example, can be covered under a homeowner’s policy if the policy owner adds them. Typically, you can add any item of value within your home to your policy, but don’t assume that just because a disaster hits that everything you own will be covered.
The IRS has this workbook to help you record a detailed list of belongings. It includes spaces to record the item and how much it cost; what you received from insurance reimbursements, if anything; any gain from casualty or theft; and the fair market value before and after the casualty/disaster. This form will help you when you file taxes and insurance claims.
Tax Planning After a Disaster
After a disaster strikes, it’s helpful to know that there are resources to help you recover lost items and begin to move on. The Tax Cuts and Jobs Act changed the rules for qualifying events. To qualify for a tax deduction the casualty loss must be due to a federally recognized disaster. Form 4684 Casualties and Thefts is what you would file with your tax return to claim net casualty losses, and you must include the FEMA Disaster Number of your county. Before tax reform was enacted, a disaster need only be unusual, unexpected, and sudden to qualify for a tax deduction.
Another change from the Tax Cuts and Jobs Act is that a casualty loss deduction can only be applied to a previous year’s return if you live in a county federally declared as a disaster area. Doing this enables you to amend a prior year return and receive an immediate refund, which is helpful when you’re dealing with all the costs of rebuilding, insurance deductibles, etc. Any casualty loss deduction will be offset by insurance proceeds, so be sure to file the appropriate claims with your insurance provider first.
The IRS will also give you a delayed filing due date if you’re affected by a natural disaster but note that any payments due are still due – it’s just the return that can be delayed. To request a copy of a previous year’s tax return, use Form 4506 or you can always call your CPA.
If you’re affected by a natural disaster, you are also allowed to borrow up to $100,000 from a 401(k) to help pay for damages, without paying the 10 percent early withdrawal penalty. Talk to your financial advisor or CPA for more details.
If you’re dealing with a disaster, keep all your receipts and documents related to the damages. Even if something catastrophic happened, don’t assume the IRS will believe you. Your CPA can help you keep track of important information and make sure you get all the tax deductions available to you.