TENNESSEAN OP-ED: TAX BREAK AVAILABLE FOR FLOOD DAMAGE
May 9, 2010
By U.S. Rep. Jim Cooper
A federal tax cut for flood victims? It's not only a great idea, it's already the law. The best part is: the bigger your loss, the bigger your tax cut.
And you don't have to wait until next year to benefit: You may amend your 2009 tax return to get your refund soon because you live in a federally declared disaster county. That's good news for taxpayers when they need it most.
This tax break is separate from any FEMA, SBA or other government aid. Get your paperwork ready, because you must be able to prove your loss.
Flood-caused damage to your car, home, or furnishings is a "casualty loss" that reduces your federal income taxes. Don't pretend everything was new; only claim damage due to the flood. Take pictures of all the stuff you've hauled to the curb because everything can be deducted. The IRS suggests 20 pages of losses. You can even deduct your entire home if it is declared unsafe by local government within 120 days of the flood.
Of course, if you had insurance, file your claim with your agent. Insurance pays first, and you can't recover twice. But if you don't have insurance, or your coverage is limited - and you don't qualify for a federal grant - you can still cut your taxes.
For example, the flood totaled your car worth $10,000. You have limited car insurance that pays $2,000. You may amend your 2009 tax return to show your $8,000 loss, or wait until you file your taxes for 2010. The IRS won't pay you $8,000, but will pay you a percentage of that amount, depending on your tax bracket (10-35 percent of $8,000).
It's similar for business: Any damage to rental property, computers, displays, inventory, etc., can be deducted from your business taxes. You'll need to know the depreciated value of your income-producing property so you can deduct whatever insurance does not cover the loss. Even paperclips count.
The deduction for direct flood damage has no dollar limit, to the extent you are a taxpayer and can document and itemize your loss. Businesses get a better deal than homeowners or renters, because businesses have no deductible. If it passes, the pending "extenders" bill in Congress lowers the household casualty deductible.
Consult your tax adviser before you make any decisions. You can download the forms from the www.irs.gov website. Forms 1040 (Schedule L) and 4684 are key. Also, study the forms' instructions and workbooks.
You will not be able to deduct termite damage or indirect expenses of the flood. For example, the cost of a rental car is not deductible unless it fits another provision of the code. And the cost of future flood prevention - like building a levee or flood-proofing a basement - is not deductible but may be capitalized.
As we recover from the 2010 flood, I want you to get every penny of help you can get.