Monday, March 24, 1997
Special tax rules
for flood victims

The Cincinnati Enquirer

The last thing most Tristate flood victims want to think about is the Internal Revenue Service's looming April 15 tax-return deadline.

But Paul Caron, a University of Cincinnati law professor and an Enquirer Money Panel member, says there are several ways for flood victims to get a break on their taxes. Here's a rundown of some basic disaster-related tax questions:

Questions: My house was damaged by the flood. Can I deduct the loss?

Answer: Only if the amount of the loss exceeds 10 percent of the homeowner's adjusted gross income (AGI). Those who haven't filed their 1996 tax return should declare their casualties and losses on Form 4684. Flood victims who have already filed a return, but need to amend it to claim losses, should file Form 1040X - the amended U.S. Individual Tax Return.

Q: How much damage must my house have suffered before I can deduct the loss?

A: Again, the damage must exceed 10 percent of your AGI. However, there are special tax rules for people in Presidential Disaster Areas. One is that even if there is no apparent damage, if the city or state declares the house uninhabitable, the homeowner can deduct the loss.

The concept behind this rule is that people declaring casualty deductions typically have a hard time convincing the IRS of the damage deduction needed.

Q: Can I also deduct the damage to my personal property, such as furniture, appliances and clothes?

A: Yes. This is covered by the same Presidential Disaster Area rule. Disaster-area residents need not list each destroyed item, but they should deduct the whole dollar amount required for complete replacement.

Q: What if I receive insurance reimbursement or disaster benefits - can I still deduct the loss?

A: Yes, except that the loss is reduced by the amount of disaster relief reimbursement, whether the relief came from insurance or federal agencies.

Q: Can I deduct my losses on my 1996 tax return to be filed by April 15 this year, or must I wait until I file my 1997 tax return on April 15, 1998?

A: This is another special rule for disaster-area residents, Congress has given flood victims the option of making the deduction in either year. Be careful about choosing the year. Because the deduction must exceed 10 percent of AGI, someone who was unemployed because of the flood would have a lower AGI in 1997 than 1998. If an individual thinks that their 1998 AGI will be lower, they should wait until next year to claim the losses.

Q: What if the amount of insurance reimbursement exceeds what I paid for my house? Must I pay tax on the gain?

A: Generally, you would have a gain if the proceeds were greater, but the special provisions for disaster areas say you don't have to report the gain if you use it to buy or rebuild a replacement home of equal or greater value within four years. In non-disaster situations, that reinvestment period is limited to two years.

Q: What if the insurance reimbursement exceeds what I paid for my personal property, such as furniture, appliances and clothes? Do I have to pay tax on the gain?

A: These losses are treated as part of the home losses and the amount of the reimbursement should be reinvested within four years.

Q: What if I rent? Can I deduct the damage to my personal property like furniture, appliances and clothes?

A: Yes, as long as the losses exceed 10 percent of your AGI.

Q: What if the amount of renters insurance reimbursement exceeds what I paid for my personal property? Do I have to pay tax on the gain?

A: The rules for renters insurance gains and homeowners insurance gains are similar. Each item does not have to be listed separately, but if there are ''schedule items'' - like stereos, silverware, home computers - listed on the policy, the renter has four years to spend the reimbursement on replacement items.

Q: Does the flood buy me time in filing tax returns or in dealing with the IRS on other tax matters?

A: For quarterly tax returns due March 15, the IRS has extended the filing deadline to April 15, but that's only for the paperwork. Interest on the payment, if you owe the IRS, will accrue during the extension period.

The IRS has suspended all audits and tax-collection efforts for anyone in this area through April 7.

Those in need of extensions, including taxpayers outside the disaster areas, can apply for an automatic 90-day extension using Form 4868.

Q: If my $50,000 house was severely damaged, can I apply to the county for an immediate reassessment to reduce the value?

A: In Hamilton County, homeowners can petition for reassessment if they file a request by April 30 with the Hamilton County Auditor's Office. In other counties, check with county tax departments for specific regulations.


Contacting IRS

If you need to reach the Internal Revenue Service for forms, publications or questions:

IRS toll-free line: (800) 829-1040.


Comments? Questions? Criticisms? Contact Greg Noble, online editor.
Entire contents Copyright (c) 1997 by The Cincinnati Enquirer, a Gannett Co. Inc. newspaper.