U.S. Markets closed

Tax Advice For Victims Of Superstorm Sandy

Tim Parker

Superstorm Sandy made landfall in New Jersey on Oct. 29, 2012. New York City Mayor Michael Bloomberg called it "a storm of unprecedented proportions." Fortunately, it will not enter the record books as the most deadly. Still, the path of destruction was severe. A total of 7.5 million households and businesses in 15 states lost power because of the storm, and officials expect total storm damage to be as high as $25 billion, according to CNN.

For those who have suffered losses because of the storm, these larger scale statistics are not important. Finding relief, both financially and emotionally, is their top priority right now, especially with tax season only a few months away.

Immediate IRS Relief
In the wake of the disaster, the IRS has moved the deadline for fourth quarter individual income tax payments from Jan. 15, 2013 to Feb. 1, 2013 for those who live in the disaster areas. In addition, major banks waived some of their standard fees for victims of the storm.

The IRS has stated that it will provide assistance and lenience to you, even if you live outside of the disaster area but have books, records or a tax professional located in the affected areas. For small businesses, the IRS is waiving penalties associated with failing to deposit federal payroll and excise taxes.

Tax on the Assistance
If your damaged property is in one of the federally designated disaster areas, then you may be eligible for grants or low-interest loans if you registered with FEMA. After the Sept. 11 attacks, Congress added Section 139 to the tax code. In general, Section 139 makes any qualified grants or payments from the federal government, or even your employer, tax-free.

There is a catch, however. Congress designed Section 139 to help those who had to pay for damages not covered by homeowner's insurance . This means that if you receive an insurance payment to cover your loss, the disaster payment you receive is taxable. You cannot deduct payments meant to reimburse you for lost income. Any money you receive as income, regardless of the source, is usually taxable.

Insurance Payments
A potential tax trap exists if you receive a Sandy-related insurance check, especially if it is for damage to your business. If you reinvest the money you receive in the business, there should be no tax consequences. If you close the business and use the money for personal purposes, however, then you will likely owe tax. The same rules apply to insurance payments for homeowners . If you use the money to restore your house, taxes do not apply. If you use the money to take a vacation, then you may have to pay taxes.

Casualty-Loss Deduction
It is true that losses you incur because of Superstorm Sandy are deductible, but many people may not qualify. According to IRS Topic 515, here is how the calculation works:

1. Calculate the adjusted cost basis (The property's purchase price plus improvement costs minus depreciation)

2. Compile the cost of the total loss

3. Reduce the loss by the salvage value or insurance payments received

4. Subtract $100

5. Subtract 10% of your adjusted gross income

"In more than four decades of preparing tax returns, I've only seen a handful of people qualify," warns New Jersey accountant Douglas Stives.

Most homeowners have insurance. For those who do not, subtracting the purchase price minus the AGI deduction will leave very little. According to the Wall Street Journal, in the aftermath of Hurricane Katrina, Congress suspended the 10% rule and made other changes to assist victims.

The Bottom Line
As the eastern part of the United States cleans and rebuilds, tax-related problems are sure to arise for the millions affected by the storm. Because of the complicated nature of topics such as FEMA payments, the casualty-loss deduction and changing filing deadlines, working with a tax professional makes sense, at least for your 2012 taxes. Refer to IRS Publication 584, "the Casualty, Disaster and Theft Loss Workbook," for additional assistance with recovery.

More From Investopedia