HOW CAN A NATURAL DISASTER TURN INTO
A FINANCIAL DISASTER?
Your tax professional may not be an
expert in dealing with a disaster income tax loss claim, or a gain that may
cost you thousands of dollars in unnecessary tax liabilities!
When casualty /
disaster losses strike, CPA’s want to be helpful to their clients. It is a
traumatic time for the client. The CPA is a steady minded adviser, seen by the
client as an expert in all things “tax.” The truth is that less than .5% of tax
returns claim a casualty loss. The average loss claimed is about $20,000. What
does this tell you? Most likely, your normal tax preparer has no experience
dealing with the intricacies and potential pitfalls of properly reporting a
casualty loss. In fact a large loss of over $100,000 probably shows up on less
than 1 in 1,000 tax returns. In my first 27 years of practice I had only one
client who experienced a casualty loss. In the last 22 years I have helped many
clients, annually, throughout the nation who have experienced a major casualty /
disaster loss.
Many of the cases that
I have been called in to assist have been “fixing” returns prepared by other
tax preparers. It would have been better if the taxpayer had sought my help
first.
As a taxpayer who is
looking for assistance, you may be eligible for a casualty loss claim. You may also
find out that you have an unexpected gain. The gain may not be apparent for a year or
two. The unexpected gain may be exempt from any taxation or it may be possible
to delay the taxation of the gain for years.
A casualty loss is
the tax result of “damage, destruction, or loss of physical property resulting
from an identifiable event that that you were powerless to prevent and it
occurred suddenly, and was unexpected and unusual.” If insurance compensation is available, the
insurance claim must be processed before claiming any loss that may result from
a loss in excess of the insurance proceeds.
Taxpayers whose damaged
property is located in a region designated as a Federal Disaster Area may be eligible
for special tax relief provisions.
Some CPA’s may go
too far. One of the worst things a tax preparer can do for a client is “create”
a loss deduction that is not supported by the facts. Some of those facts may
not be evident as part of a quick cursory analysis. When a casualty loss is claimed that is not
justified, and the IRS audits that loss, the client will be subjected to denial
of the deduction, repayment of taxes, interest charges and penalties.
Remember, the amount
you save in taxes as a result of claiming a casualty loss will never equal the economic
loss that you realized. The best defense, the best strategy is adequate insurance
coverage. Unfortunately many insurance companies under-insure their customers,
sometimes, in order to sell the policy based on a premium cost expectation of
the client. Not all policies are the same, not all premiums are the same.
Any loss that you
claim on a tax return will be subjected to legal limitations and the remaining
loss will only be a deduction on your return not a “payment” or “credit” from
the IRS for the amount of the loss. The greater your pre-loss taxable income is,
the greater the “value” of the deduction.
The preparation of
tax returns that include a casualty loss must be looked at differently. Most
“normal” returns are much like a “scrap book” for the year of your financial
life; W-2’s, 1099’s, mortgage interest 1098’s, etc. All of these are static
fixed amount forms. They are snapshots for the year’s income and expenses. But,
a casualty loss involves a situation that will likely impact your tax return
for many years. While the normal tax return may be a “scrap book,” casualty loss
reporting is more like “producing” a movie that spans multiple years. Given
that situation, it is important, when preparing the return, to “play the movie
to the end of the real.” Yes, the subsequent years are projections, but if they
are not considered, a new disaster can develop. You can’t just put numbers down
on a tax return for the year without considering how the situation is going to “play
out over the next several years.” If you don’t understand how things may occur
next year or even two years from now, you will likely make bad decisions today.
Those bad decisions will likely cost you dearly in the future.
The tax law in this
area is very empathetic towards taxpayers. But, if you don’t follow the rules
very precisely, you will likely make a costly error.
I offer you a free
30 minute analysis consultation that will determine how you should proceed.
Maybe your CPA understands the situation and will get you through the process. Maybe
the CPA understands the law, but is not able to properly report the situation on
a return. If you need my services maybe I can work with your tax preparer or maybe
I need to prepare the whole return for you. All it will cost you, initially, is
30 minutes.
JOHN TRAPANI
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Certified Public Accountant
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2975 E. Hillcrest Drive, #403
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Thousand Oaks, CA 91362
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(805)
497-4411 E-mail John@TrapaniCPA.com
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Website:
www.TrapaniCPA.com
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It All Adds Up For You
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