Many families and businesses in our area have been hit hard by recent flooding, including some of our employees here at Faulk & Winkler. The federal government has officially declared a disaster area covering several local parishes. We realize that tax returns can be the last thing on the mind of a family trying to recover, but wanted to provide a brief explanation of federal tax implications for those affected. Tax deductions can be impacted by many factors, so every situation may be unique. Please let us know if we need to do a more in-depth analysis of your situation. If not, be sure to mention any consequences of the recent flooding when we are preparing an end-of-year tax projection or your 2016 tax return.
Tax return payment and filing deadlines have been extended. As part of the recent disaster declaration, filing deadlines for federal tax returns due after Aug. 15, 2016 have been extended to Jan. 17, 2017. This includes calendar year 2015 partnership, corporate, and fiduciary returns that were extended to September; individual 2015 Form 1040 tax returns that were extended to October; 2016 third-quarter estimated payments ordinarily due Sept. 15; and 2016 third-quarter federal payroll tax returns due in October. For employers, late payment penalties will be waived for federal payroll tax deposits due between Aug. 11 and Aug. 26 as long as they are made by Aug. 26, 2016. The declaration currently covers affected taxpayers in Acadia, Ascension, East Baton Rouge, East Feliciana, Iberia, Lafayette, Livingston, Point Coupee, St. Helena, St. Landry, Tangipahoa, and Vermillion parishes. It is possible more will be added. These extensions do not waive late payment penalties and interest on 2015 income tax balances since those balances were technically due earlier in the year.
Is my insurance reimbursement taxable?Insurance reimbursements are generally not taxable income. However, if your insurance proceeds exceed your basis in the property, you could have a taxable gain. This stipulation is more applicable to business than personal property. If the property is your primary home, then you can probably avoid most or all of that gain. For other personal and business property, you have a window of time to spend the insurance proceeds on replacement property to avoid being taxed on the gain. For example, if you had a car that you use for business purposes and it is fully depreciated, then you must use the insurance proceeds to buy a replacement car within the window to avoid income tax. The window of time is four years for a primary home in a disaster area and two years for everything else.
Are federal disaster relief payments taxable? Since the area was declared a federal disaster area, assistance is available through FEMA. We encourage you to visit www.disasterassistance.gov for more information. Payments under these programs and state assistance programs are generally not taxable income. Qualifying businesses may also contact the Small Business Administration regarding their Disaster Loan program.
What if I have unreimbursed damages? The federal government allows a tax deduction for casualty losses on your federal income tax return. The amount of the loss that can be deducted is limited to the lesser of the decrease in the market value of your property as a result of the flood or your basis in the property. The IRS will consider the cost of your repairs for the calculation, but you must be able to show that the repairs were reasonable and did not improve your property over its value before the storm. If this isn't the case or you aren't going to repair the damage you incurred, you should obtain an appraisal of the post-flood value from someone certified to do the work. You should take pictures and/or video to thoroughly document damaged property. Any insurance or government proceeds you receive to replace your property reduce the deduction you can claim and there is a limitation based on 10% of your adjusted gross income (AGI) for personal property, so it may be best to do the math before spending time and money on a property appraisal. Business property, including rental property, is not subject to the 10% of AGI threshold.
As a simple example, assume that an individual's (or jointly-filing couple's) AGI on their tax return was $100,000, they own their home, the home has a market value before the flood of $200,000, the home was completely destroyed, and they receive an insurance payment of $80,000. After the flood, they get an appraisal saying their property is now worth just $50,000 for the land. The individual (or couple) can claim a casualty deduction of $59,900 ($150,000 decrease in value - $80,000 insurance reimbursement - $10,000 based on 10% of AGI - $100 per event limitation = $59,900). Similar deductions are also available to renters.
I won't file my 2016 return for a year and need all the help I can get now. Special disaster-area rules allow us to claim losses from this flooding event on your 2015 tax return. If we have already filed your 2015 return, we can amend it to claim a loss if you meet the other requirements. If available, an immediate refund can be more help now than next year. This applies to businesses and individuals in the listed parishes. Other factors, like your projected income, influence whether or not this is the best option, but we must make that determination before your 2016 return is due (April 15, 2017 for individuals).
If you have any questions about your situation or if you need any assistance, please contact our office at (225) 927-6811.