Recent changes to tax law have affected Disaster Casualty Loss relief landscape and tax reporting requirements. Disaster Casualty losses will require special consideration and guidance restricting the deductibility of losses more so than in previous years. 

Navigating disaster casualty losses in 2020 and 2021

As the nation entered a year of uncertainty with the COVID-19 pandemic in 2020, multiple areas of the United States were further affected by devastating natural disasters. 2020 was an active year for hurricanes, wildfires, tropical storms, earthquakes, and severe storms. In March and April, many in Tennessee suffered through severe storms with tornadoes, wind damage, and flooding. The National Weather Service reported that Tennessee had 35 tornadoes in 2020, as of September. This very active and devastating tornado season caused 28 deaths, injured hundreds, and caused billions of dollars in damage across multiple areas of the state including Davidson, Putnam, Wilson, Bradley and Hamilton counties.

The damaging storms continued in early 2021 with severe storms, straight-line winds, tornadoes, hurricanes, and flooding in several states across the U.S. The IRS has so far issued 12 separate notices with disaster guidance regarding events across the United States and its territories, available on their website at: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations.

The IRS issued guidance in May to extend certain filing and payment deadlines for 2020 returns for individuals, especially those affected by natural disasters. Now that the extended filing dates have passed, it is time to look forward to the issues affecting 2021 returns for these taxpayers.

Federally declared disasters

It may be difficult to navigate and know what is required in order to maximize any tax benefits during such a tumultuous time. The IRS recognizes affected taxpayers in certain areas designated by the Federal Emergency Management Agency (FEMA) as eligible to receive relief. The IRS maintains a current list of disaster events and the associated tax relief on their website. FEMA also offers online search tools to help you navigate disaster information.

You are considered an “affected taxpayer” if you are located in a federally declared disaster area or if the records necessary to meet your tax filing or payment deadline are located in a covered disaster area.

Every loss is unique, and each disaster declared by FEMA has its own guidance, assistance, and tax relief. In general, the first step during a loss event is to assess what damage has occurred. Coverage for your losses may include a balance of insurance claims and FEMA assistance.

For losses not covered by insurance, per IRS guidance, “Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either the year in which the event occurred, or the prior year. Individuals may deduct personal property losses that are not covered by insurance or other reimbursements.”

There are special steps for claiming the loss. For example, related to the Tennessee events this year, the taxpayer should put the Disaster Designation, “Tennessee, severe storms, tornadoes, straight-line winds and flooding” at the top of the tax form. The associated disaster declaration number, FEMA 4476, from FEMA’s guidance for your disaster should also be included on any return.

Amending your 2020 return

In certain instances, it may be beneficial to amend your 2020 return to claim the disaster relief – if you filed already. Certain IRS guidance allows the taxpayer to claim a 2021 loss on the 2020 tax return. A comparison can be created with different projections to help you determine if claiming the loss in 2021 or amending 2020 would provide your best tax outcome.

Planning for the future

Disaster preparedness and response should include not only insurance planning and safety measures, but also maintaining records to make it easier to timely file and maximize the benefits available under Federal assistance for disaster recovery.

Steps you can take to plan for disaster planning include the following:

  • Maintain off-site or “in the Cloud” copies of records that you will need in the case of an adverse event.
  • Keep records of assets and belongings up-to-date with current photos and valuations for any new additions along with insurance and other important documents.
  • If needed, keep a fireproof/weatherproof box to contain the original documents you need on-hand at home or your business. Include an up-to-date contact list you might need in case of a disaster.
  • Create digital records of your keepsakes such as family photographs and heirlooms.

Backup services are available from different online providers. If you put these processes in place now to keep your digital records up-to-date, you will be well-positioned for future uncertainties.

A special note about other losses

In 2018 with the Tax Cuts and Jobs Act (TCJA), the rules for claiming casualty and theft losses beyond those incurred outside of Federally Declared Disaster areas became more restrictive. Prior to 2018 and after 2025, certain losses can be claimed. However, with the TCJA, you can only deduct 2018-2025 casualty and theft losses that are directly tied to an event declared a disaster by the U.S. President under section 401 of the Stafford Act.

If you or loved ones are recovering from losses sustained during a disaster, reach out to your LBMC tax advisor for recommendations and guidance in this difficult time. With recent tax legislation, the rules governing disaster losses for taxpayers and business owners have changed. Your LBMC tax advisor can help you with any tax matter questions you may have in planning for future disaster preparedness.