The recent hurricanes in the U.S. Virgin Islands left homeowners and businesses alike with massive damage unlike anything they had seen in the past. These property losses continue to have major implications on families and businesses now that tax season is upon us.
Fortunately, new laws enacted several months ago provide special tax breaks for those who suffered damage due to Hurricanes Harvey, Irma and Maria. Below are a few tips to get some extra tax relief this spring:
Use personal casualty loss write-offs to their fullest extent
You legally suffer a casualty loss whenever the fair market value of your property is reduced by an event such as a storm, flood or earthquake, to the extent those losses are not covered by insurance. These deductions are usually less than what one might expect due to the limitations of standard tax laws, but the laws implemented this fall loosen those restrictions. As a result, hurricane victims can take advantage of more deductions.
A knowledgeable tax planning attorney can provide you with more detailed information about the amount you could save through this deduction.
Use business casualty write-offs if you own business property
You can double dip on casualty write-offs if you suffered major damage to both your personal and business properties. For business property, you would deduct the full amount of uninsured loss as a business expense or, if you operate as a sole proprietor, on Form 1040.
As with personal casualty losses, business casualty write-offs can only be used for federally declared disasters. The hurricanes from this past fall do qualify.
Consider special rules for a primary residence
Special rules apply to any involuntary conversion gains on a primary residence. A primary residence is considered the place that is your main home for the last two years. For owned primary residences, you may use the federal gain exclusion tax to reduce these conversion gains. If, after taking advantage of the gain exclusion tax break, you still have a gain, you have four years (instead of the standard two) to make appropriate payments to repair or replace property and avoid involuntary conversion gains.
If you rent your home, there is no taxable gain from any insurance proceeds that cover losses to personal property. Thus, you do not need to repair or replace damaged items to avoid the conversion gain. Instead, you can do whatever you want with your insurance money.
Leverage your retirement account
The IRS has announced that 401(k) plans and other employer-sponsored retirement accounts can make loans or hardship distributions to hurricane victims and their families. Typically, there would be a 10 percent early withdrawal penalty, but hurricane victims can avoid paying that penalty for a limited amount of time while they fix their homes.
Extend your deadlines
Hurricane victims can benefit from extended deadlines. In the U.S. Virgin Islands, for example, tax filing and payment deadlines that had been set for early September were pushed to January 31, without any application for such an extension being necessary. Taxpayers may apply for other extensions to give themselves more time to get their affairs in order while they concentrate on making repairs.
For more information on tax relief opportunities available to hurricane victims, meet with a skilled tax planning attorney in the U.S. Virgin Islands.
Adam N. Marinelli is an associate in the Corporate, Tax and Estate Planning Practice Group at BoltNagi PC and concentrates his practice in tax matters. BoltNagi is a full service business law firm serving the U.S. Virgin Islands.