Special Tax Relief for Victims of the April 15 Northeaster

TAX ADVICE from Julian Block

(May 24, 2007) The northeaster that ripped through Westchester on April 15 caused many millions of dollars in damages in Larchmont, Town of Mamaroneck and Village of Mamaroneck. Elsewhere in Westchester, it struck Rye and Hartsdale, among other places in the county. Now that President Bush has declared the area a federal disaster, IRS rules allow for some relief. (See: Westchester Declared Disaster Area, Eligible for FEMA Help.)

The floodwaters destroyed sheds and play equipment along Mamaroneck's Howard Avenue. Photos courtesy of the Whittemores.

The northeaster’s victims include Bernie and Jim Whittemore, whose raised ranch home on Mamaroneck Village’s Howard Avenue was at the “epicenter” of the flooding. The Whittemore’s place experienced a double whammy — over $15,000 in damages in the heavy rain in March and over $100,000 in April. Their basement and ground floor were completely submerged, and floodwaters rose to the first floor, ruining kitchen appliances, cabinets, floors, walls and windows. They are waiting to see how much of their losses will be covered by flood insurance and FEMA, but they may end up with many thousands of dollars in uncompensated losses.

Polluted water backed into the Whittemore's bathroom during the April storm.  

Add Marney Ranani, owner of Nana’s Kids across from Columbus Park, to the roster of victims. She had four to five feet of water in her daycare center. A raft of help from across the community got Nana’s Kids operating again a few weeks after the flood. But without flood insurance and ineligible for direct grants from FEMA, Ms. Ranani estimates her losses at over $30,000.

After the flood, Marney Ranani (right) reopened her Mamaroneck Village child carecenter, Nana's Kids, with help from parents, local businesses and a community effort spearheaded by Judy Rozner (left), Sunny Goldberg (center). She may get more relief from the IRS. Photo by Burt Rozner.

The IRS stands at the ready to partially ease the hurt for individuals whose dwellings and businesses were damaged or destroyed by the northeaster. But the agency authorizes relief only for those who suffer serious property damage. What follows are answers to the most-often-asked questions by the northeaster’s victims.

Q. Just how harsh are the restrictions on write-offs for casualty or theft losses?

Losses (minus insurance reimbursements and $100 for each casualty or theft) are deductible only to the extent that their total amount in any one year surpasses 10 percent of AGI, short for adjusted gross income. The $100 and 10 percent limitations do not apply to casualty or theft losses of business property or investment property, such as rental real estate. For instance, Ms. Ranani’s losses are fully deductible.

My client roster includes Larchmonters “Rudolph and Flavia Crane.” The Cranes anticipate that their 2007 return will show an AGI of $100,000. Because of the northeaster, their dwelling suffered damages of about $1,000, after subtracting $100 and any insurance proceeds they recover. With those numbers, the Cranes get no deduction for the first $10,000 (10 percent of $100,000), resulting in a deductible amount of just $1,000. Assuming they fall into a 30 percent federal and state tax bracket, a deduction of $1,000 lowers their taxes by $300. They lose out on any deduction as soon as their AGI surpasses $110,000.

Q. What kind of immediate relief is there for property damaged or destroyed by the northeaster? 

Usually, the Cranes can claim casualty losses only on the 1040 form for the year in which they occur. But an alternative becomes available when losses occur in places that the president declares disaster areas eligible for federal assistance. Consequently, the disaster declaration for Larchmont and other parts of Westchester County qualifies the couple for quick tax aid, as well as other types of help.
Their choice is between a deduction for the disaster area loss on the return to be filed for 2007 or the one filed for 2006, whichever is more advantageous. Picking 2006 could mean a quicker refund now, when the Cranes need a cash infusion to help pay for property repairs or replacements. If they do so, they must use 2006's AGI in calculating the 10 percent limitation.
An example: The northeaster causes $25,000 in noninsured damage to the home of another Larchmont resident, “Norma Bates.” Her AGI is likely to be $60,000 for 2007 and was $40,000 for 2006. Norma’s allowable deduction: 2007's is $18,900 ($25,000 reduced by the $100-per-occurrence rule to $24,900, then reduced by $6,000 or 10 percent of AGI), whereas 2006's is $20,900 ($25,000 reduced by $100 to $24,900, then reduced by $4,000 or 10 percent of AGI).

Assuming Norma falls into a 20 percent federal and state bracket for both 2007 and 2006, a deduction of $18,900 lowers taxes by $3,780 and a deduction of $20,900 lowers taxes by $4,180. So going the 2006 route saves an additional $400 ($4,180 minus $3,780).

Should she amend 2006’s return? Frequently, the answer is neither straightforward nor simple. It depends on her particular situation and might be a close call.

Q. How complicated is the paperwork for Norma’s submission of her refund claim for a disaster loss?

She can use Form 1040X to amend 2006's return without complicated red tape. All Norma need do is explain the loss and compute the refund due. To speed up processing of the refund, she should write something like " Westchester County, NY, disaster area claim – Northeaster of April 15" at the top of the 1040X.
Norma has to take the entire deduction in a single year; splitting the deduction between 2006 and 2007 is a no-no. Approval of a refund claim does not preclude a subsequent examination of her return. Hence, amending for any reason may prompt the IRS to question other return items or, worse yet, other returns.

Q. What about help from others?

Norma’s deductible loss is cut down by cash or property she receives from her employer or from disaster relief agencies specifically for the purpose of restoring her property, but not by cash gifts that are not so designated. This holds true even though the money goes to pay for the rehabilitation of property. Any food, medical supplies, and other forms of subsistence she receives that are not for replacing property do not reduce her loss, and do not count as taxable income.

Julian Block lives in Larchmont and is an attorney, syndicated columnist and former IRS investigator. The New York Times has called him “a leading tax professional.”

This article is excerpted from “The Home Seller’s Guide To Tax Savings.” For information about his books and more articles, "www.julianblocktaxexpert.com. Copyright 2007 Julian Block. All rights reserved.