Tax Relief for Hurricane Victims
By a federal law known as the Stafford Act, people affected by a natural disaster are entitled to tax relief. The disaster must be declared by the president. Before 2008, special tax benefits would be arranged for each disaster area as it was declared. A new, more comprehensive federal law was passed in the wake of a string of hurricanes that hit the United States in 2004 and 2005, including Hurricane Katrina and Hurricane Ike. This National Disaster Relief Act assists taxpayers affected by federally declared disasters in 2008 and 2009.
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Net Operating Losses
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The act allows taxpayers and businesses in the disaster zone to carry back losses, which includes disaster damages and related expenses, five years, extending the period from two years. The losses can be carried forward 20 years. In addition, the law allows the taxpayer to use net operating losses caused by the disaster to offset 100 percent (in place of 90 percent) of income taxable under the alternative minimum tax (AMT).
Easier Mortgage Terms
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The new law waives mortgage revenue bond requirements for taxpayers whose principal residence is affected by federally declared disasters. If a house is destroyed in a disaster or demolished because of extensive damage, the law relaxes the requirements for getting a new mortgage loan. For repairing damaged homes, the homeowner may borrow money as a "rehabilitation loan" that can be financed from tax-exempt mortgage bonds, which carry a lower interest rate. The law limits these terms to rehabilitation loans of $150,000 or less.
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Buying Damaged Goods
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The law also grants a "depreciation allowance" when a taxpayer purchases certain real estate and "disaster assistance property" within three years (four years in the case of real estate) of the disaster. A taxpayer buying such property is allowed to deduct 50 percent of the cost, in addition to normal depreciation allowance. The property eligible includes many different types of goods for personal use. To qualify, the individual taxpayer must repair and rehabilitate the damaged property and/or real estate. If the property is destroyed or condemned, it must be replaced in the same county to qualify for the bonus allowance. Expenses of up to $250,000 can be claimed against income when rehabilitating or replacing qualifying property that costs up to $800,000. Up to $25,000 of the cost of sport-utility vehicles can also be expensed.
Casualty Losses
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Anyone can deduct casualty losses caused by a federally declared disaster, no matter what their adjusted gross income. Prior law limited casualty-loss deductions for upper-income taxpayers. Individuals must reduce their casualty losses by $500, rather than $100, for disasters occurring in 2008 and 2009. The deduction is no longer limited to 10 percent of adjusted gross income. It also can be taken even if the taxpayer does not itemize deductions.
Cleanup Expenses
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Taxpayers can also deduct cleanup expenses for a business or trade affected by a federally declared disaster. These include the costs for abatement of hazardous waste, the costs of debris removal or the expense of repairing damaged property.
Filing Deadlines
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The IRS has also granted an extension of deadlines for filing tax returns in specified disaster areas, including parts of Texas and Louisiana struck by hurricanes in the summer and fall of 2008. Businesses were also relieved of penalties for filing late quarterly employment or excise taxes.
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