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Tax Breaks for Disaster Victims

Although April 18 is the deadline for most taxpayers in the U.S., victims of Colorado wildfires or the tornadoes that devastated parts of Kentucky, Arkansas, Illinois and Tennessee, have until May 16 to file individual and business tax returns and pay any taxes owed, notes Sandra Block, Kiplinger's Personal Finance.

Taxpayers in the affected areas have until May 16 to contribute to their 2021 IRAs too, adds Block.

Tornado and wildfire victims will also get more time to make the quarterly estimated tax payments. If you missed the estimated tax payment for the fourth quarter of 2021 that’s normally due on Jan. 18, you can include it with your 2021 tax return that’s due May 16.

If you live in the affected areas, you don’t need to contact the IRS to get this relief. However, if you receive a late-filing or late-payment penalty notice from the IRS, call the number on the notice to have the penalty abated.

The IRS says it will work with taxpayers who live outside the affected areas but had tax records in the disaster zones. This includes workers assisting the disaster-relief activities who are affiliated with a recognized government or philanthropic organization.

The 2017 Tax Cuts and Jobs Act limited the deduction for unreimbursed casualty losses, but it’s still available if the losses occurred in a federally declared disaster area.

You must itemize to claim this deduction. But even if you ordinarily claim the standard deduction, your losses, combined with other deductible expenses, could push you over the standard-deduction threshold. You must subtract reimbursement from your insurance provider and funds from government assistance when you calculate your loss, along with any reimbursements you expect to receive.

Once you’ve determined that you have enough deductions to get over the threshold to itemize, you must reduce the amount of your unreimbursed losses by $100. After that, you can only deduct unreimbursed losses that exceed 10% of your adjusted gross income (AGI). If, for example, your AGI last year was $150,000 and your total net loss was $83,000, you would first reduce it to $82,900, then knock off $15,000, leaving you with a net deduction of $67,900.

To compute and report casualty losses, fill out IRS Form 4684. You must enter the FEMA disaster declaration number on that form. Taxpayers who are eligible for the casualty loss deduction have the option to claim the loss in the year it occurred – 2021 in the case of the December tornadoes – or for the previous year. That allows you to choose the year that will give you the biggest tax break.

If you decide to claim it for 2020, you can amend your 2020 return by filing Form 1040X. You must file your amended prior-year return no later than six months after the due date for filing your current-year return for the year in which the loss took place. That means for tornado losses in 2021, you would need to file an amended 2020 return by Oct. 17, 2022.

Editor’s Note: Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine, www.Kiplinger.com.

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