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April 15, 2010
TAX FILING SEASON EXTENDED
Today, April 15, is usually the last day to file your income taxes and pay any tax that you might owe without a penalty. But….President Obama has declared 7 counties in Massachusetts as federal disaster areas and has extended the deadline for filing and payment of income taxes until May 11, 2010. Massachusetts has followed suit and also extended their filing deadline.
Residents of Worcester, Middlesex, Essex, Suffolk, Norfolk, Bristol and Plymouth counties will get more time to file and pay their taxes. If you live in any of these counties and receive a notice that you have filed and paid your taxes late, even though you meet the May 11 deadline, you are directed to call the telephone number on the notice and the penalties will be abated. The IRS computers are supposed to automatically know if you reside in a disaster area, we’ll see how that goes.
If you are one of the many who has gone to a tax preparer, had your taxes completed and electronically filed, and given a payment voucher to mail to the IRS along with your check by April 15, the May 11 deadline does not apply to you. You must pay by April 15. The extended deadline only applies if you have not filed your income taxes yet.
The relief granted by the IRS includes the extended filing deadline, being able to claim losses that took place in March 2010 on either their 2009 or 2010 income tax returns, and expedited service from the IRS to get prior tax return information that might be needed to prepare this years return for flood victims.
Should you claim your flood losses on your 2009 or 2010 income tax return? Without knowing what your income and expenses are and what they will be for 2010, this is not an easy answer. But, if your income and expenses are relatively stable from year to year, it is safe to assume that taking the deduction and getting the refund now, instead of waiting a year to get the same refund is probably a good idea.
For tax purposes, flood damage is considered a casualty loss. Here are the factors that you need to determine in order to compute your income tax deduction:
1) The cost of the damaged property,
2) The decrease in the fair market value of the property, and
3) Insurance or other reimbursement you received or expect to receive.
For flood victims, you need to calculate the cost for that portion of the property that was damaged, and compare that to the decrease in the fair market value of the property due to the flood. Unfortunately, neither of these amounts is easily determined. If the loss is large we generally recommend an appraiser to determine the decrease in the FMV of the property. From the smaller of these two amounts you must subtract any insurance recovery. The result is your casualty loss amount.
The final hurdle before taking the loss as a tax deduction is that you must reduce the loss amount by a $500 deductible, if claiming the loss on your 2009 tax return. The deductible drops to $100 if you claim the loss on your 2010 income tax return. Normally, casualty losses must also be reduced by 10% of your income but the National Disaster Releif Act of 2008 eliminated the requirement to reduce of your loss by 10% of your adjusted gross income if you are in a federally declared disaster area. Here’s an example:
Example: Last March, Bob and Alice’s home was damaged by localized flooding. They purchased their home for $150,000 several years ago and feel that one-third of it was damaged by the flood ($150,000/3=$50,000 loss). They hired an appraiser who determined that their home would now be worth $300,000, but due to the flood it is only worth $200,000. They did not have insurance but did receive $10,000 from the federal government. Their adjusted gross income is $50,000.
Their loss of $50,000, based upon their cost, must be reduced by the $10,000 received from the federal government and then reduced by a $500 ($100 if claiming the loss in 2010) deductible. This amounts to $39,500. Use for 4684 to calculate and claim your loss.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves as the President of the Friends of the Saugus Senior Center and is an active member of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions, please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org