Should you amend your 2016 tax return to claim for a casualty loss deduction? An email came in tonight from a client who was unhappy that she has not been told to amend her 2016 tax return to claim for a casualty loss deduction.
Most taxpayers believe that the IRS has granted tax relief by allowing them to amend their 2016 tax return to claim for a refund as part of a hurricane relief effort. Little did many of these taxpayers realize that there are rules, dos and don’ts and there is even a deduction limit to claiming these deductions. For example, if you have a loss of 100K and your insurance company is in the process of reimbursing you for the 100K, you cannot claim for the casualty loss deductions. If you have a loss of 100K and your AGI is 1 million, you can only claim losses exceeding 10% of your AGI, which in this case, you really will not be able to claim any losses at all.
If you have suffered significant losses and believe that you will receive a substantial refund by claiming casualty losses, below are the evidence you need to gather in order to claim for the casualty losses:
You need to know the cost or adjusted basis of each property.
You need to know the insurance amount you have received for those losses. If you are in the process of claiming for insurance reimbursements, you should wait before submitting form 4684 – which is the form you would use to claim for the casualty loss deduction.
Determine the fair market value of your property before the hurricane and after the hurricane. You need to have sufficient proof (i.e. a valuation report from a professional insurance adjuster) to prove these fair market values. The fair market values will not be values you “think” or “guess” how much these properties are worth for. Having a thorough appraisal or valuation report from a professional firm which specializes in providing valuation services is crucial.
Something to bear in mind:When you amend your tax return, you increase the risk of your tax return being audited. If you have fully settled your tax balance in year 2016, claiming a refund from 2016 tax return means foregoing deductions you are allowed to enjoy in 2017, essentially increasing your taxable income for year 2017, which means in six months, you will need to have sufficient cash ready to pay for your 2017 tax balance, if you have not made sufficient quarterly tax payments.
What is better for you? To receive “quick money” from the IRS by rushing to amend your 2016 tax return while at the same time raising your IRS audit risk unintentionally and also risk the chance of having to make further corrections if you do receive insurance claim from FEMA in the next 90 days, OR….
Wait a little… Pause… Think… Analyze the consequences… Preserve the deductions you have, gather complete and accurate information and have these deductions deducted in 2017 so you can offset these deductions against your 2017 income, therefore, reducing your taxable income in 2017.
As a business owner, to make good decisions, it just makes sense to sometimes give yourself more time to analyze the pros and cons on every action you are about to take rather than rushing into one very quickly. Do you agree?
Need more guidance on how to prepare for your 2017 taxes, go to https://www.xqcpahouston.com/links-and-useful-resources.
As always, you can call my office at 832 795 9612 to schedule for a tax meeting if you have additional concerns or questions. We are here to help!
Charlene Quah, CPA, Certified Tax Coach, QuickBooks ProAdvisor