Casualty Losses in Federally Declared Disaster Areas

It’s winter 2010 now, but remember back to the severe winter storms of 2009 in Arkansas, Washington State, and other places?

If you suffered losses to your home or other personal property in those storms, you may be eligible for a deduction for your losses, even if you do not itemize your deductions, because you lived in a federally declared disaster area.

You lived in a federally declared disaster area if you lived in any of these Arkansas counties (Benton, Conway, Johnson, Madison, Pope, Searcy, Van Buren, Washington, or Yell) or Washington State Counties (Pend Oreille, Spokane, or Stevens). These are a few areas I am familiar with; for a full list of 2009 federally declared disaster areas, see http://www.fema.gov/news/disasters.fema .

Here’s how it works:

A casualty loss can result from “the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, or earthquake.”

If it is personal-use property (I’ll address business-use property another time), the amount of your casualty loss is the lesser of the basis of your property (usually your cost increased plus improvements) OR the decrease in fair market value of your property as a result of the casualty.

For casualty losses NOT in federally declared disasters, you must further reduce your loss by 10% of your adjusted gross income. Then, only individuals who itemize deductions are able to deduct the casualty loss as an itemized deduction on Schedule A.

However, the National Disaster Relief Act of 2008 changed some of the tax rules pertaining to losses resulting from federally declared disasters. The new law is effective for losses attributable to disasters federally declared in taxable years 2008 and 2009. It provides the following:

• Allows all taxpayers, not just those who itemize, to claim the net disaster loss deduction regardless of the taxpayer's adjusted gross income

• Removes the 10 percent of adjusted gross income limitation for net disaster losses

• Provides a 5-year net operating loss (NOL) carryback for qualified disaster losses

This is only a brief overview of the provisions of this disaster relief act, and there are many limitations and restrictions on these provisions. However, if you suffered a loss during those winter storms last year, please check with me personally to see how these rules apply to your tax situation.

Tax-Free No-Interest Loan from an IRA?

Q I heard that I can borrow money from my IRA without paying any tax on the money I withdraw. Is this true?

A The answer is a qualified ‘yes’, but be very careful. Here’s how it works:

Generally, the entire amount distributed from an IRA (or other qualified trust or eligible retirement plan) must be deposited in another such account within 60 days. If you withdraw money from an IRA and ‘roll it over’ into another IRA within 60 days, there are no adverse tax consequences.

So, that could be considered a no-interest, short-term loan.

However, if you fail to deposit all of the funds into the new IRA within 60 days, the entire amount is included in your gross income. Plus, you may be subject to the 10% early withdrawal penalty.

The IRS typically is not forgiving about this deadline. A good-faith misunderstanding between the taxpayer and the financial institution usually has been grounds for a waiver if the taxpayer clearly did not intend that funds be withdrawn from an IRA or gave instructions that were intended to complete a timely rollover. Other administrative mistakes by the financial institution can also be grounds for waiving penalties.

However, the tax literature is full of seemingly reasonable excuses the IRS did not go along with. For example, a taxpayer was two days late rolling over an IRA because his spouse was admitted to the hospital for emergency surgery on day 58. The IRS refused to waive the penalty or allow for a late rollover.

So, if you intend to use an IRA withdrawal as a short-term loan, be sure to deposit the money into another IRA within 60 days.

What to Do if you Have Not Received a W-2

Q. I haven't received one of my W-2s. What should I do?

A. If you do not receive your Form W-2 or Form 1099-R by January 31st , or your information is incorrect, contact your employer.

If you do not receive the missing or corrected form by February 14th from your employer/payer, you may call the IRS at 800–829–1040 for assistance. You must provide your name, address (including zip code), phone number, Social Security Number, dates of employment, your employer/payer's name, address (including zip code), and phone number. The IRS will contact the employer/payer for you and request the missing form. IRS will also send you a Form 4852 (PDF), Substitute for Form W-2 or Form 1099-R.

If you do not receive the missing form in sufficient time to file your tax return timely, you may use the Form 4852. If you receive the missing or corrected Form W-2 or Form 1099 after you file your return and a correction is needed, you should use Form 1040X Amended U.S. Individual Income Tax Return to file an amended tax return.

The IRS recommends against filing your tax return with only the information from a last pay stub. For one thing, the Employer Identification Number (EIN)is usually not on the pay stub, and it is required for filing. Also, if you had pre-tax withholding for medical insurance or retirement savings, your W-2 year-to-date amounts may be different from those on your last pay stub of the year.

So if you file with your last pay stub, you may need to file an amended tax return later to correct the errors.