Hang On to Quake-Repair Receipts for IRS

Question: Is earthquake damage deductible on federal and state tax? What paper work is needed to prove the loss and please the Internal Revenue Service?--M.K.

Answer: Uncle Sam isn’t entirely without a heart--appearances, sometimes, to the contrary. Casualty losses not covered by insurance--whatever their source--are generally deductible, although, according to Rob Giannangeli, public affairs spokesman here for the IRS, a few ground rules apply.

“The loss, naturally, is defined as the difference between the fair market value of the property before and after the quake and is normally measured in terms of the costs of the repairs,” Giannangeli said. “But, of course, it doesn’t apply if the homeowner, in making the repairs, upgrades it--like replacing regular glass with stained glass, or something like that.”

At the same time, though, there are a couple of other limitations on the deductibility. “The first $100 of damage isn’t covered--it’s a sort of deductible,” Giannangeli added. “And, in addition, there’s a minimum limitation of 10% of your adjusted gross income. Both were written in so the IRS wouldn’t be flooded with deductibles for minor casualty losses--it really has to be a serious one.”

In other words, Giannangeli said in explanation, if “you have a $50,000 loss and your adjusted gross income is $40,000, you would reduce that $50,000 by $4,100--10% of your adjusted gross income plus $100--to give you a deductible loss of $45,900.”

And the State of California uses exactly the same formula, according to Jim Reber, a public affairs spokesman in Sacramento for the Franchise Tax Board--including the same $100 deductible and the same 10% of adjusted-gross-income limitation.

There’s just one novel variance from the federal guideline in the state’s approach, however, Reber said. “The taxpayer can take the loss either in the current year or, if he prefers, on last year’s return. I don’t know why anyone would want to do it that way, but that’s the way the law’s written.”

Any paper work necessary to prove the validity of your claim is no more, nor no less extensive than it is to prove any tax deduction, the IRS’ Giannangeli said. Keep your receipts and invoices in the event your deduction is challenged. It’s primarily a matter of common sense.

Homeowner’s insurance, the handy catchall for most casualty losses to which the average homeowner is exposed, simply isn’t operative “for damage caused by earth movement,” according to Richard Wiebe, executive director of public affairs for the Alliance of American Insurers, an association of approximately 150 companies in the insurance industry.

“The one exception,” he said, “is glass breakage--whether it’s caused by the quake or not. The homeowner’s policy does cover this.”Fire damage loss is covered, even though the fire may have been caused by the quake.

Q: I’ve enclosed a copy of a clipping from The Times earlier this month concerning Chrysler Corp.’s offer to settle some class-action suits resulting from the company’s criminal indictment for allegedly disconnecting odometers on vehicles that were driven by Chrysler executives and then sold to consumers without this fact being known.

I have a Chrysler that was included in this, and I was notified by the company concerning it about two months ago. Do I have to contact the lawyer mentioned in your story to be included in the class-action suit, or will I automatically be included?--M.G.

A: It isn’t necessary for you to do anything, according to Baron Bates, Chrysler’s vice president for public relations, especially because you were notified by the company that your car was, indeed, one of those affected. The letter you received asked you to bring your car in to a local dealership, at which time the warranty would be extended to seven years or 70,000 miles, so your name is clearly a matter of record.

At least nine class-action suits were filed on behalf of Chrysler customers following the indictment in June. “When we resolve the class action with the various lawyers involved,” Bates said, “we’ll pass along to them (the lawyers) the names of everyone who is entitled to whatever additional compensation, if any, that is settled on.”

The bone of contention in the class-action suits is the $500 cash settlement that Chrysler offered to pay 32,000 buyers who, in all innocence, bought used cars when they thought they were getting new ones. Lawyers representing them insist that $500 is too low.

Q: I read your recent column dealing with Social Security’s income lid. The answers you gave agree with my information and my experience for the most part. However, the ending paragraph contained a surprise. It specifically says your business expenses can be written off against gross earnings and that the $8,100 ceiling applies to net earnings.

I am over 65 and on Social Security. I worked almost an entire year and had a gross income of about $45,000. In reviewing my obligation to repay Social Security for exceeding the limitation, no indication was given that any consideration would be given for expenses incurred while working away from home to earn this money. Even the Internal Revenue Service wouldn’t allow my expenses, although I clearly met the requirements of their Publication 17 (“Your Federal Income Tax”) for that year.

The year in question was 1984, and I was required to repay the full amount I had received--more than $9,000. Is there any way I can file an appeal to Social Security to recover some of this money?--W.F.B.

A: Without knowing more details, it’s a little difficult to know why both Social Security and the Internal Revenue Service trashed you back in ‘84, according to both Joe Giglio and Rob Giannangeli, public affairs specialists for SS and IRS, respectively.

Two possibilities emerge here, however: Either the IRS (and Social Security) did not regard your work that year as being “self employed” in nature, or that business about “expenses incurred working away from home to earn this money” was disallowed by the IRS, which has very rigid rules about how “away from home” is defined.

The real key in being able to deduct business expenses against gross earning, Giglio said, is that the work engaged in has to be as a free agent--work in which no employer is dictating your hours, output nor providing a place in which to perform the work. You are providing your own workplace, supplies and equipment. A free-lancer, purely and simply.

Otherwise, the $8,100 ceiling (before you start losing a portion of your Social Security benefits) is flatly on your gross earnings.

The other consideration here is that $45,000 you grossed in ’84. Even if this were earned, fair and square, as a self-employed individual, you would have to have one whale of a lot of legitimate expenses not to exceed the $8,100 net ceiling. It would hardly seem to be a productive use of your time.

Because Social Security generally “goes along” with the IRS in defining “self-employed,” any recourse would have to be leveled at the IRS rather than Social Security. You should have appealed it at the time, the IRS’s Giglio said, but you can still have a crack at it by filing a claim for a refund on a part of your ’84 taxes.