New Tax Relief for Texas, Oklahoma, & Louisiana Residents in Wake of Severe Winter Storms

In response to the winter storms Uri and Viola, the IRS has granted several forms of tax relief for many Texas, Oklahoma, and Louisiana residents. Note, the relief discussed in this article is separate from the March 17 IRS announcement that provided an extension of the federal income tax filing due date for individuals for the 2020 tax year to May 17, 2021. This announcement does not change the information provided below.

Automatic Extensions for Time to File & Pay

The IRS has postponed due dates falling on or after February 8, 2021 (Oklahoma), or February 11, 2021 (Texas and Louisiana), to June 15, 2021. The IRS will automatically provide filing and penalty relief to any taxpayer with an IRS address of record located in these states. There is no extension filing requirement or notification required to claim this relief. This includes the filing and payment due dates related to quarterly income tax estimates, quarterly payroll and excise tax returns, and any business and individual income tax returns.

Taxpayers not in the covered disaster area but whose records necessary to meet the filing deadline are in the covered disaster area also are entitled to relief. This would apply to any taxpayers whose books and records reside with a CPA, accountant, or bookkeeper who was affected by the disaster. If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment, or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.

IRA Contribution Deadline Extension

The extension of the income tax return due dates also means the deadline to contribute to an individual retirement account (IRA) has been extended. Taxpayers in affected areas will now have until June 15 to make 2020 IRA contributions.

Casualty Losses

FEMA issued a declaration of disaster for many Texas counties on February 19, for some Oklahoma counties on February 24, and for some Louisiana counties on March 10. This declaration prompts the IRS to allow the deduction of damages incurred related to the disaster—in this case an extreme freeze occurrence—for the taxpayers residing in the covered areas. Therefore, losses incurred by a person or business due to damaged pipes, interior flooding, and other related expenses can be claimed as a casualty loss, subject to limitations. See “How to Determine the Loss” later for more details on these limitations.

When to Claim the Loss

A taxpayer can claim the loss on the 2021 tax year (year of the loss) or the current 2020 income tax return (year preceding the loss). The taxpayer has the option to amend their 2020 tax return that has already been filed to claim a casualty loss for damaged property that is uninsured or if there is reasonable certainty the loss will not be reimbursed. If you claim a disaster loss on the 2020 tax return and then subsequently receive insurance proceeds or reimbursements after filing, you may be required to file an amended tax return to update your casualty loss claim.

See the “How to Claim the Loss” section below for more information.

How to Determine the Loss

A casualty loss is generally determined by figuring the decrease in fair market value (FMV) of the damaged property. The IRS provides five safe harbor methods that a taxpayer may use to determine their decrease in FMV. If any of these methods are used, the IRS will not challenge your determination of FMV. The decrease in FMV also must be reduced further by any reimbursements, grants, or insurance proceeds received. See the “Disaster-Related Expenses” section below for costs that might be beneficial to include in your calculation of FMV.

1. The de minimis safe harbor method can be used if the total casualty loss is less than $5,000. A taxpayer may estimate the cost to repair the property to its original value immediately before the disaster. This estimate must be in good faith and be supported by records that detail a methodology.
2. The insurance method can be used no matter how much the casualty loss ends up being. This method allows a taxpayer to figure the decrease in FMV based on reports prepared by their insurance company.
3. The contractor safe harbor method can be used no matter how much the casualty loss ends up being. This method allows a taxpayer to use the repair cost as the estimate of the decrease in FMV, but only if the repair cost is documented on a binding contract between the taxpayer and an independent licensed contractor. These repair costs must not be excessive and must be a good faith estimate of what is necessary to bring the property back up to its original value before the disaster.
4. The estimated repair cost method can be used if the total casualty loss is less than $20,000 and the taxpayer is not yet under a binding contract with a contractor. This method generally allows a taxpayer to use the lesser of two repair estimates prepared by two separate and independent licensed contractors. The two repair estimates must be an itemized list of all repairs necessary to bring the property back up to its original value before the disaster.
5. The disaster loan appraisal method can be used no matter how much the casualty loss ends up being. This method allows a taxpayer to use an appraisal prepared to obtain a loan of federal funds or a loan guarantee from the federal government that identifies the estimated loss to determine the decrease in the FMV of the damaged property.

There are several other IRS-approved safe harbor methods for assigning value to personal belongings. Contact your BKD Trusted Advisor™ for more details.

Loss Limitations

A taxpayer’s losses must overcome two limitations in order to be deductible. First, the first $100 of each loss is nondeductible. This $100 floor applies to each item of loss, meaning if a taxpayer experiences two disasters or casualties in the same year, the $100 floor would apply to each item separately before applying the AGI limitation. Second, the total losses from all casualties must be in excess of 10% of the taxpayers adjusted gross income from the year that the loss is claimed. For example, let’s assume a taxpayer has $100,000 AGI, $35,000 in losses, $15,000 proceeds from insurance. The deductible loss is $9,900, as illustrated below:

Unreimbursed Expenses - $100 - (AGI x 10%) = deductible loss

($35,000 - $15,000) - $100 - ($100,000 x 10%) = $9,900

How to Claim the Loss

File federal Form 4684 with the Form 1040 for the year that you wish to claim the deduction. A taxpayer can claim the casualty loss even if they are not itemizing deductions by entering the words “standard deduction claimed with qualified disaster loss” on line 16 of Schedule A. Report the amount of deductible loss from Form 4864, line 15. This amount, combined with the eligible standard deduction, should be reported on Form 1040, line 12.

To claim a loss on the preceding year’s return, a taxpayer must make an election on the 2020 tax return by completing part I of Section D on the Form 4868. This election to treat the disaster loss as if it had happened in the preceding year must be made within six months of the original due date of the return, meaning any losses claimed on the 2020 tax return for a disaster that actually occurred in 2021 must be filed by October 15, 2021.

Be sure to use the disaster designation “Texas – Severe Winter Storms DR-4586-TX,” “Oklahoma – Severe Winter Storms DR-4587-OK,” or “Louisiana – Severe Winter Storms DR-4590-LA” in the top margin of Form 1040 or 1040x when claiming a casualty loss in the preceding year of the disaster.

Disaster-Related Expenses

Examples of damaged property include furniture, fixtures, appliances, damaged flooring, or drywall. The cost of cleaning up or making repairs could be included in the measure of the decrease in FMV if the costs are used to repair the damaged property to its original condition and will not result in the property being valued at more than just before the disaster occurred.

Landscaping expenses due to damaged or destroyed trees, shrubs, or other vegetation can be included in the measure of the decrease in FMV. Examples of landscaping expenses include removing destroyed trees, taking measures to protect trees and vegetation, and the cost to replant and restore the property to its original value immediately before the disaster.

For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.

Sources

• Victims of Texas winter storms get deadline extensions and other tax relief
• IRS announces tax relief for Oklahoma severe winter storm victims
• IRS announces tax relief for Louisiana severe winter storm victims
• Texas Severe Winter Storms (DR-4586-TX)
• Oklahoma Severe Winter Storms (DR-4587-OK)
• Louisiana Severe Winter Storms (DR-4590-LA)
• About Publication 547, Casualties, Disasters, and Thefts
• Publication 584 (02/2019), Casualty, Disaster, and Theft Loss Workbook
• Internal Revenue Bulletin: 2018-2, Rev. Proc. 2018–08