The Good Tax News: Uninsured Disaster Losses Are Deductible

With Friday the deadline for filing income taxes, the disaster-weary can at least look forward to some tax relief: Uninsured casualty losses from the Jan. 17 Northridge earthquake--as well as from last fall’s fires and mudslides--are deductible on individuals’ federal and state returns.

Moreover, because the Northridge quake was declared a federal disaster, victims of the temblor can choose to take those losses on either their 1993 or 1994 returns. That is a major advantage for people who expect their 1994 incomes to be lower.

But doing all this additional figuring can take time--which is why many people are expected to ask the Internal Revenue Service and California Franchise Tax Board for filing extensions this year.

“No doubt there will be a lot more extensions than usual,” said Paul White, a partner in the Sherman Oaks accounting firm of White, Zuckerman, Warsavsky & Luna. Among his clients, “more people who usually file early are at least waiting until the last minute.”

White’s firm is temporarily renting offices in Burbank because the quake demolished the accountants’ headquarters. The firm was relieved when it was able to find or recover all the records needed to prepare its clients’ 1993 returns, he said.

But many taxpayers have not been as lucky, losing important documents that they need to file their 1040s because the quake damaged their houses.

“Just about every client I’ve worked with has lost at least some records,” said Alan Kennan, a tax partner in the Los Angeles office of the accounting firm Grant Thornton.

Others will have to file extension requests with the IRS (Form 4868) because “they are still waiting for the simplest of records,” said Elaine Blackman of White, Zuckerman.

Those records may include W-2s from their employers or 1099s showing investment income, she said.

In such cases, “the government basically expects you to reconstruct your income and deductions for 1993,” Kennan said.

If people still end up having to guess at, say, how much they gave to charity in 1993, label it an estimate, he advised. But they should be conservative because the government will check it carefully, he said.

Even figuring out your deductible casualty loss can be a headache.

“First you have to get a real estate appraiser to tell you what the value of your property was before the disaster and after,” Kennan said. The difference is your tentative loss.

Insurance payments must be subtracted from that tentative loss, producing a net loss figure.

But there is a catch: To be deductible, casualty losses must exceed 10% of your adjusted gross income--basically income before itemized deductions--plus $100.

Rep. Howard L. Berman (D-Panorama City) has introduced federal legislation to make uninsured losses 100% deductible for victims of declared national disasters.

In California, state Sen. Herschel Rosenthal (D-Los Angeles) has authored a bill that would provide identical relief for disaster victims on their state tax returns.

Neither bill is expected to pass by Friday, spokesmen for Berman and Rosenthal said.

However, if the proposed legislation is enacted later, taxpayers entitled to the bigger write-offs could file amended returns. The tax breaks would apply to losses on declared disasters that occurred on or after Jan. 17, the day of the quake.

Deciding whether to take the limited loss that is available now this year or next year may be easy for people faced with extensive rebuilding--but still waiting for disaster aid.

“The question is, how badly do you need cash now?” Kennan asked. “Fixing your house may be more important than waiting a year to get a bigger deduction.”

Requesting an extension to sort all this out can provide nearly six months’ reprieve--to Oct. 14 this year because Oct. 15 is a Saturday.

Even with a filing extension, the IRS and the California Franchise Tax Board expect checks for about 90% of the amount owed to be in the mail by midnight Friday. Although it is possible to get an extension for paying federal taxes, it is not automatic.

The state does not grant extensions per se, tax board spokesman Jim Shepherd said. But, he said, people with quake damage should make the state aware of their situation.

“If someone is assessed a penalty for filing late or paying late and it was because of the earthquake, we will be lenient if they protest the penalty,” Shepherd said. “We’re the same way when there is any type of catastrophe.”