The replacement cost of the food can be deductible if not reimbursed by insurance. 

 Costs would be deductible once they a)exceed insurance proceeds, b) exceed $100 per event and c) exceed 10% of AGI ( adjusted gross income) for individual taxpayers.

The cost to clean up and remove damage would be deductible if not reimbursed by insurance. 

Replacement costs would be covered to bring the property back to its original state as long as the costs were not excessive. 

An alternative to this “Replacement Cost” approach would be to determine if the fair market value of the real estate in total was reduced.  This probably would require an a appraiser to review the property both before and after as well as document his opinion in order to pass muster with the IRS.

Costs would be deductible once they a)exceed insurance proceeds, b) exceed $100 per event and c) exceed 10% of AGI ( adjusted gross income) for individual taxpayers.

 Please keep the questions coming.

There are different rules for deducting damage losses if the loss is incurred on business property or nonbusiness (personal use) property.

Business Property

If the damage was caused to business property (i.e. income producing property), the loss is the smaller of the decrease in fair market value (FMV) caused by the casualty and the adjusted tax basis (investment less depreciation deducted over time).  The lower of the two numbers then must be reduced by insurance reimbursements.  This calculated value represents the casualty loss.  Other expenses such as clean-up costs and temporary replacement costs are not part of the casualty loss.  You may be able to consider these costs as other deductible business expenses but they are not part of the deduction for the loss.

In order to establish the amount of the loss, you may need to contact an appraiser (real estate, machinery/equipment appraiser or other qualified person) to determine the value both before and after the casualty loss in order to determine the decrease in FMV.  Documentation (pictures, reports, replacement costs) should be kept at least three years beyond the sale of the property to establish the loss and prove the adjusted tax basis of the investment.

All casualty gains and losses are to be netted in any calendar year.

Nonbusiness Property

Personal property losses follow similar loss rules as business property to determine the amount of the loss.  However, there are two additional hurdles to jump through in order to take the loss deduction.  The loss must exceed $100 and 10% of the taxpayers adjusted gross income.  By completing Federal form 4684, you can determine the amount of the deduction which then becomes one of your itemized deductions in the year of the loss.

The bottom line is that many taxpayers who suffered a loss may not have a tax deduction since the loss must exceed the reimbursement of insurance proceeds, $100 threshold and 10% of the taxpayers adjusted gross income.

Tax Deferral of Gain

A casualty event may result in a gain rather than a loss.  For business property, this often happens when insurance proceeds exceed the adjusted basis of the property lost.  If a net gain does occur, the taxpayer generally has two years to replace the property with like-kind property of equal value in order to defer the gain.  For example, if the casualty loss was rental property it must be replaced with similar property, but it does not have to be at the same location, just the same use of the property (income producing property).  The replacement property can not be a vacation home since it is not of similar character.

With nonbusiness property, gain is less likely.  However, if someone has owned their residence for a long period, it is possible there will be a gain.  Again, you generally have two years to replace the property with like-kind property.  However, there is another opportunity if the home is considered your principal residence.  Each individual can exclude gain on the sale of a principal residence of $250,000 ($500,000 for married couple) if they had used the home as the primary residence for 24 months out of the last 60 months and the ownership of the property is relinquished.  Once this principal residence exclusion is used, it usually will reset so that 24 months down the road, you will again have an additional exclusion available to you.  This may provide a unique planning opportunity for some individuals to exclude a portion of the gain rather than to defer the gain.

Reduction in Basis

When a casualty loss is deducted, the taxpayer is required to reduce the basis in the property by the amount of the loss deduction.  This will prevent a double deduction when the property is sold later.

Federal Disaster Area Designation

For Hampden and Worcester counties, the June 1^st Tornados were declared a federal disaster event by the president.  There are a few additional rules available to the taxpayers in these two counties.  First, there will be an extension of time to pay certain taxes and file certain returns to give taxpayers some time to recover and prepare returns.  Any returns or tax payments due from June 1^st through August 8^th have been given an extension of time to file until August 8^th.  There will also be a waiver of penalties and interest.  Second, the replacement period is extended from two years to four years when replacing property or reinvesting within the disaster area.  Third, taxpayers are allowed to choose between the prior year (2010 tax year) and the current year to take the casualty loss deduction.  This may be advantageous for two reasons, to speed up a tax refund and allow taxpayer to maximize the tax benefit of the loss deductions.

Additional information

Additional information can be obtained by consulting the Internal Revenue Service Publication 547 at www.irs.gov/publications/p547, instructions for Federal Form 4684, Casualty and Theft Losses, or by contacting your tax preparer.  It is wise to consult with your preparer well in advance of the tax filing deadline so that you may take full advantage of any elections and planning opportunities.

January 2011

The estates of wealthy individuals who died in 2010 may not be required to pay any federal estate tax, but that situation is about to change. Under the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” the federal estate tax, which disappeared for 2010, was resurrected in 2011 and is imposed at the top rate of 35% of the estate’s value after the first $5 million of value.

Background

The modern estate tax dates back to 1916, when it was imposed at a rate of 10% on assets owned by an individual on the portion of estates above $50,000. Over the following years, the rates and exemption amounts have varied, reaching a high of 77% from 1941 to 1976 with a $60,000 exemption amount.

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the first of the two large legislative packages that contain most of what are now commonly referred to as the “Bush tax cuts.“ EGTRRA gradually lowered the maximum estate tax rate and substantially raised the applicable exclusion amount over the years 2002 through 2009. The maximum tax rate fell from 60% under prior law in 2001 to 45% in 2007-2009. EGTRRA repealed the estate tax completely for decedents dying in 2010. That led to several well-publicized instances in which famous people died in 2010 leaving multibillion-dollar estates that will pass to their heirs without paying so much as a penny in federal estate tax. However, all of those provisions were scheduled to sunset on December 31, 2010, meaning that if Congress had not acted, starting January 1, 2011, the estate tax would have returned to a higher tax rate of 55% and a small exemption of $1 million ($2 million per couple).  When the exclusion was $3.5 million ($7 million for couples) in 2009, few households were subject to the federal tax, but with the lower exemption amounts, the people impacted by this tax would grow dramatically.

New law

The new law brings back the estate tax for calendar years 2011 and 2012. During 2011 and 2012, the top rate will be 35%. For 2011, the exemption amount will be $5 million per individual (indexed for inflation after 2011). At those levels, the vast majority of estates (all but an estimated 3,500 nationwide in 2011) will not be subject to any federal estate tax.  By way of comparison, the 55% tax with a $1 million exemption would have resulted in about 43,540 taxable estates in 2011.

The new law also gives heirs of decedents dying in 2010 a choice of which estate-tax rules to apply – 2010′s or 2011′s. That’s important because although there is no estate tax in 2010, some inherited assets are subject to higher capital gains tax under the 2010 rules, a situation that could actually raises the tax burden for some heirs. Inherited assets under the 2010 rules have a tax basis equal to the original purchase price rather than the value at death. That could lead to a significant tax burden for heirs who sell assets such as stocks that had been held for many years and have greatly appreciated in value. Under the 2011 rules heirs will be allowed to inherit assets with a “stepped-up basis.” (the value at death).  While most heirs would choose the 2011 regime ($5 million exemption from both estate and generation-skipping tax and an unlimited step-up in the basis of assets to their current market value), the heirs of superrich decedents could find it more advantageous to elect the 2010 law (limited step-up in the basis of assets and no estate tax). If the executor makes the election to have the 2010 rules apply, the estate tax return’s due date will not be earlier than the date that’s nine months after the new law’s enactment date.

For gifts made after December 31, 2010, the gift tax rules will change.  Under the new law, the estate and gift tax exemptions will be combined and treated as if they were one tax scheme starting in 2011, which means that the $5 million estate tax exemption will also be available for gifts. The estate and gift tax law in effect prior to 2010 provided a $3.5 million lifetime exemption for estates, but only $1 million for gifts. The gift tax rate, starting in 2011, will be 35% (the same as the top estate tax rate). The exemption from the generation-skipping tax (GST) – the additional tax on gifts and bequests to grandchildren when their parents are still alive – will also rise to $5 million from the $1 million it would have been without the new law. The GST tax rate for transfers made in 2011 and 2012 will be 35%.

From a planning standpoint, a nice feature of the new law is that it makes it easier to transfer the $5 million exemption to a surviving spouse, so married couples can shield $10 million of their assets from taxes. In the language of tax professionals, the estate tax exemption will be “portable.”

If you would like more details about the estate tax or any other aspect of the new law, please do not hesitate to reach out to me.

Be sure to consult your tax preparer and estate tax advisor before making any changes to your current situation.  And, return here to find additional tax tips as I continue to glean through the new law and update this blog.

BusinessWise briefs: Estate tax strategies | cincinnati.com | Cincinnati.Com.