FAQs for victims of Hurricanes Katrina, Rita and Wilma, victims of the May 4, 2007, Kansas storms and tornadoes, and victims of the midwestern area disasters of 2008 (03/09) Q: When may I elect the provisions of Internal Revenue Code Section 165(i) which allows me to deduct disaster related losses in the prior year? A: Taxpayers who sustain losses attributable to a disaster occurring in an area subsequently declared by the federal government to warrant assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act may elect section 165(i) treatment. For purposes of §165(i), a disaster includes an event declared by the federal government as a major disaster or emergency. (03/09) Q: How long does it take for the IRS to process amended returns filed by disaster victims making a Section 165(i) election? A: The IRS expedites processing of amended returns notated with the appropriate disaster information, i.e. “Hurricane XXXXX." The timeframe is generally 60 days. For more information, see: Publication 544, Sales and Other Dispositions of Assets Publication 547, Casualties, Disasters, and Thefts Publication 551, Basis of Assets Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma Publication 4492-A, Information for Taxpayers Affected by the May 4, 2007 Kansas Storms and Tornadoes Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas In computing the "tax benefit," you are advised to review Publication 525, Taxable and Nontaxable Income. (03/09) Q: A taxpayer affected by a disaster timely filed a federal income tax return for the taxable year the disaster occurred and did not claim a casualty loss deduction on that return. May the taxpayer wait until a later year and amend the original return to claim a casualty loss deduction reduced by insurance and other reimbursements received in subsequent years? A: A taxpayer may claim a casualty loss deduction for the first time on an amended original return as long as the amended return is timely filed. That casualty loss must be reduced by insurance and other reimbursements. If a taxpayer properly claimed a casualty loss deduction on an original return and in a later year receives reimbursement for the loss, the taxpayer does not amend the original return but reports the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced the taxpayer’s income tax in the tax year in which the taxpayer reported the casualty loss deduction. See pages 5-7 of Publication 547, Casualties, Disasters, and Thefts in the section entitled “Insurance and Other Reimbursements.” In 2008, special legislation was passed that resulted in changing the tax law to allow a homeowner who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and in a later tax year received a grant as reimbursement for the loss, to amend the tax return on which the individual claimed the casualty loss to reduce the loss by the amount of the grant. If the grant received equaled or exceeded the casualty loss the individual deducted, then the casualty loss would be reduced to zero. To qualify, a taxpayer must have claimed a casualty loss to a principal residence, the loss must have resulted from hurricane Katrina, Rita, or Wilma, and the taxpayer must have received in a later tax year a grant under Public Law 109-148, 109-234, or 110-116, such as a grant from the Road Home program, as reimbursement for the loss. If the taxpayer made a Section 165(i) election to deduct the loss in the previous year, then the previous year is treated as the loss year and the taxpayer may amend the return for the previous year. If the taxpayer carried back the casualty loss to prior taxable years as a net operating loss, then the taxpayer may amend the tax return or returns to which the loss was carried back. A taxpayer who chooses to amend the tax return for the loss year or any carryback years must file the amended return or returns by the later of either: (1) the due date for filing the return for the tax year the taxpayer received the grant; or (2) July 30, 2009. If the reduction of the taxpayer’s allowable casualty loss by the amount of the grant results in an underpayment of tax for the loss year or any carryback year, any penalties or interest will be waived, as long as the taxpayer pays the additional tax within one year of filing the amended return or returns reducing the casualty loss deduction. For more information, see: Publication 544, Sales and Other Dispositions of Assets Publication 547, Casualties, Disasters, and Thefts Publication 551, Basis of Assets Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma Notice 2008-95, Notice to Address Amended Returns for Hurricane-Related Casualty Losses and Subsequent Grants Reimbursing Such Losses Publication 4492-A, Information for Taxpayers Affected by the May 4, 2007 Kansas Storms and Tornadoes Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas In computing the "tax benefit," you are advised to review Publication 525, Taxable and Nontaxable Income.
