Income Tax Deductions for Hurricane Related Casualty Losses

Many Florida residents, particularly those in Southwest Florida, suffered casualty losses from Hurricane Irma recently. My thoughts are with those families and individuals at this challenging time, as many of us recover from a loss of utilities, flooding, and damages to our homes and communities. Nevertheless, these tragic circumstances offer keen insight into what kinds of preparations to take care of this upcoming tax season.

IRS Form 4684 is used to report gains and losses from casualties and thefts. Casualty losses are losses from fire, theft, storm, hurricane, flood, sonic boom, earth slide, earthquake or other sudden, unexpected and unusual causes. Damage to your automobile resulting from a collision is also a casualty loss.

To qualify for the deduction, these losses usually need to be substantial. If you were significantly underinsured or had a large catastrophe deductible – for hurricane damage, for example – you may have a sizable unreimbursed property loss.

“Personal losses are claimed as an itemized deduction and are reduced by $100 per casualty event as well as 10% of adjusted gross income,” said Linda Treise, of Hughes, Snell & Company CPAs, Fort Myers, Florida.

If the casualty loss relates to your business, you can deduct the full amount on Schedule C. The amount of the casualty loss is the lesser of (1) the fair market value of the property before the casualty less the fair market value of the property after the casualty or (2) the adjusted basis of the property before the casualty happens.

According to IRS Publications, the definitions and guidelines for claiming income tax deductions for hurricane related casualty losses are as follows:

Disaster Area Losses – A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. It includes a major disaster or emergency declaration under the Act. See IRS Publication 547, Casualties, Disasters, and Thefts, for more information.

Casualty Losses – A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn’t include normal wear and tear or progressive deterioration.

If your property is personal-use property or isn’t completely destroyed, the amount of your casualty loss is the lesser of:

  • The adjusted basis of your property, or
  • The decrease in fair market value of your property as a result of the casualty

If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis.

Theft Losses – A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent.

The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

Insurance or Other Reimbursements

You must reduce the loss, whether it’s a casualty or theft loss, by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. For more information about the basis of property, refer to Topic 703, IRS Publication 547, Casualties, Disasters, and Thefts, and IRS Publication 551, Basis of Assets. You may determine the decrease in fair market value by appraisal, or if certain conditions are met, by the cost of repairing the property. For more information, refer to IRS Publication 547.

Claiming the Loss

Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A , Itemized Deductions, (or Schedule A in Form 1040NR , if you’re a nonresident alien). For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you’ve subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year. Report casualty and theft losses on Form 4684 , Casualties and Thefts. Use Section A for personal-use property and Section B for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer to IRS Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer to IRS Publication 584-B , Business Casualty, Disaster, and Theft Loss Workbook. These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records.

When to Deduct

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the casualty loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. See Revenue Procedure 2016-53 for guidance on making and revoking an election under Code Section 165(i). Review Disaster Assistance and Emergency Relief for Individuals and Businesses for information regarding timeframes and additional information to your specific qualifying event. For more information, refer to IRS Publication 2194 , Disaster Resource Guide for Individuals and Businesses.

Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which you can determine with reasonable certainty whether or not you’ll receive such reimbursement.

Any money you receive from insurance, government, or other parties to compensate for the damage reduces the amount of loss you can claim on your tax return. EXAMPLE: A hurricane completely destroys your home. You purchased your home five years ago for $500,000, but the fair market value of the home before it was destroyed was $700,000. You receive an insurance reimbursement of $400,000. The amount of your loss is $100,000 ($500,000 basis less $400,000 reimbursement). Assuming your adjusted gross income for the year is $100,000, you can take a $89,900 casualty loss on Schedule A ($100,000 – $10,000 – $100).

If the property is used in a trade or business, slightly different rules apply, so it is important to ask a qualified tax preparer for assistance.  If you think you might qualify for this deduction, collect all receipts, insurance statements, the police report (if appropriate) and other documentation and present it to your tax preparer to see if you qualify. And, of course, stay safe in this trying time.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.

When to Throw it Away

My father-in-law, Ronald, is a pack rat.  He and my mother-in-law can’t park their cars in the garage of their condominium because of all his stuff cluttering it up. There are old transistor radios, televisions (the black and white variety), kitchen appliances and a host of other things that you couldn’t sell on eBay if you tried.

“What’s this?” I asked picking up a large plastic bottle off of a folding table overflowing with all sorts of junk.

“Vitamins!” Ronald replied, “I got those on sale at Eckerd’s!”

“Eckerd’s hasn’t been around in how many years?!” I asked examining the faded label on the old bottle. “These expired in 1994! Why don’t you throw them away?” I said tossing them into the garbage can. From the look on my father-in-law’s face, I could tell he wasn’t happy with me.

Which leads me to today’s topic – when to throw away old estate planning documents. Often when I update clients’ documents, they ask me what of their old documents should they get rid of.

Let’s address ancillary documents first. Generally speaking, you can get rid of most old durable powers of attorney, health care surrogates and living wills if they have been updated. The one thing that you have to be careful about in this group is the durable power of attorney. Generally speaking it’s okay to get rid of old durable powers of attorney. Where this general rule doesn’t apply – and you need to take other action – is when one of three things has happened: 1) the power holder has a copy of it; 2) it has been used; or 3) a copy of the power of attorney is on file with a bank or financial institution.

If any of those three things are true, then you should have your attorney go through the legal steps necessary to actually revoke the power of attorney. Florida law provides step-by-step instructions that must be followed to properly revoke an old durable power of attorney, including sending notice to the power holder as well as to the proper offices of any financial institution where it has been used. Failure to legally revoke an old durable power of attorney could result in its continued use by the power holder – and unintended and possibly adverse consequences.

Next let’s talk about wills. When you update your will, you might update it by adding an amendment to it – called a “codicil”, or you may revoke the old will in the new one, and create a whole new will. When you amend your will with a codicil, you should retain the old one, since it (or parts of it) remains valid. When you update a will by restating it in its entirety and revoking the old one then it is usually okay to throw out the old one.

The only reason you may wish to keep an old will (or a copy of it) when it has been restated in its entirety is when you want to show a history of some act – such as disinheriting a certain friend or relative.

If you have a revocable living trust, you usually want to retain the old trusts, even if they have been restated in their entirety. This is due to the fact that new trusts usually build on old ones. As an example, let’s say that I have a trust dated January 1, 1996. I restate that trust in its entirety on July 1, 2011. I want to keep the old trust because it has a provision in it that allowed me to amend it – and usually the new trust keeps the date of the old trust so that I don’t have to re-title all of the assets that have been transferred to it. So if the IRS or a financial institution needs to see the old trust to make sure that the new one amending it is valid – it’s a good idea to have that old trust around for that proof.

When you’re like my father-in-law who likes to keep things – then this column is of little use to you. But if you are like me and like to clean out useless clutter from your life, then you should ask your attorney which documents you can safely dispose of.

And – by the way – if you would like an old blender that won’t work – give me a call. I can get you a great deal on one.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Trustee Liability

When naming spouses, children or other loved ones to serve as trustees in your testamentary (after death) trust or trust shares, consider a recent case where an estate trustee who took an “egregious” position in litigation has been ordered to personally pay more than $140,000 in costs.

Lawyers say the costs decision in Craven v. Osidacz is part of a growing body of case law that says executors need to be cautious in how they conduct themselves in litigation, and, if they are not, they’ll be ordered to pay costs personally. Before someone takes on the role of an estate executor, personal representative or trustee, the party should know that they may have exposure to significant personal liability rather than assuming that their costs are all going to get paid out of the estate.

Historically, in estate dispute matters, courts order costs to be paid from the estate, but they have been shifting away from this in recent years whenever executors have engaged in unreasonable conduct during litigation. The case I refer to above concerns a claim for damages by Julie Craven after her estranged spouse, Andrew Osidacz, stabbed their son to death and threatened to kill her before he was shot to death by police in 2006.

The deceased husband’s brother, Michael Osidacz, became the executor of his estate. Craven brought a wrongful death suit against the estate as well as a claim for damages, as her deceased spouse physically assaulted her before they separated. The litigation dragged on for a decade, ultimately ending in May with a $565,000 judgment in Craven’s favor.

The Superior Court Justice found that Osidacz acted to carry out a vendetta against Craven to limit the compensation she would get from the estate and that he submitted “virtually no evidence” in the estate’s defense. “His actions went far beyond ‘misguided litigation’ and amounted to harassment of another party,” the decision read.

Craven sought more than $156,000 in legal costs.

The Judge ordered the estate trustee to pay costs personally on an elevated basis, as his conduct was “foregoing, reckless and egregious.” Osidacz will also be required to pay his own costs in addition to an order to repay the estate legal costs.  The decision serves as a stern warning for estate trustees to make sure they seek direction from the court and look to resolve matters at a very early stage.

This case is a good example of how litigation can become expensive, and it is therefore important for lawyers and the fiduciaries acting for an estate to consider putting evidence before the court in a non-contentious manner, because, if they’re unsuccessful, costs might be awarded personally against the estate trustee. To that end, many courts order the parties to engage in mediation in an effort to resolve disputes without trial.

While the extreme facts of this case don’t necessarily make it precedent for all matters where an executor/trustee unsuccessfully challenges a claim, it does offer a cautionary warning. I should note that this case originated out of Ontario, Canada and is not from the United States. Nevertheless, the warning is clear:  unreasonable conduct on the part of an executor/trustee may lead to personal liability.

Most estate trustees go into litigation thinking that they’re going to get all their costs paid out of the estate and it’s not going to cost them anything. As this case demonstrates, that’s not always the case.

This is a broad warning not only to those who take on the office of executor or trustee, but also speaks to the choices that one makes when naming their successor trustee. I have written a new book Selecting Your Trustee that delves deeper into these issues. I’ve found that many clients don’t fully understand the responsibilities associated with serving, and therefore don’t always make good decisions. This book provides guidance. For more information contact my office.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.