Hurricane Sandy Related Information
Many of us were severely impacted by Hurricane Sandy. For those of us still dealing with its aftermath, here’s a condensed view of pertinent resources and information.
- New York, New Jersey, and Connecticut disaster areas are eligible for both individual and public FEMA assistance.
- Rhode Island disaster counties were deemed eligible for public assistance only.
- Further, the President declared emergencies in parts of Delaware, the District of Columbia, New Hampshire, Pennsylvania, Maryland, Rhode Island, Virginia, and West Virginia. As such, those areas are eligible for category B public assistance.
- Qualified disaster recovery payments made by employers to employees for recovery expenses may be tax-free and excluded from taxable wages under IRC Sec. 139
- An itemized deduction may be available for personal losses from fires, storms, car accidents, and similar “sudden, unexpected, or unusual” events
- The deduction is only available for physical damage or loss to your property
- The loss is measured as the lesser of (a) the drop in value and (b) your basis in the property.
- Limitations on the deduction:
- The loss figure must be reduced by three amounts:
- First, to the extent you are insured, you must reduce your loss by your reimbursement.
- Second, for each casualty, you must reduce your loss amount by $100.
- his reduction is per “event,” not per item damaged. Thus, if a storm knocks over a tree that damages your car and home, you have three property losses (tree, car, and house) and only one reduction.
- Third, after combining all your losses under the above guidelines, you must reduce them by 10% of adjusted gross income (AGI) in the appropriate tax year (see below). Only the loss amount above this “floor” may be deducted.
- Where property is held for both business (or profit) and personal purposes, these limits apply only to the personal part of the loss.
- Except for “disaster losses,” the deduction is taken in the year the loss is incurred. For a federally declared disaster area, the loss can be taken in the year before it was incurred. As a result, taxpayers may need to wait to determine in which year it would be most sensible to claim the loss.
- Individual taxpayers who don't itemize deductions can't deduct their casualty losses. The additional standard deduction that was allowed to non-itemizers for net losses from federally declared disasters occurring in 2008 or 2009 is not available for disasters occurring in 2010 or later years.
- IRS resources:
- Publication 584, 584B; Publication 547
- Form 4684
- Damages received for injury to business that represent compensation for lost profits (including business interruption insurance proceeds) are taxable as ordinary income.
- Insurance proceeds that compensate for the loss of the right to use property due to loss or destruction may qualify for non-recognition as involuntary conversion proceeds, but the proceeds of a use and occupancy insurance contract that expressly insures against actual lost profits do not qualify and are treated as taxable income. Reg § 1.1033(a)-2(c)(8)
- The essential elements of an involuntary conversion are a property loss caused by destruction (complete or partial), theft, seizure, or condemnation.
- If property is involuntarily converted directly into similar property and gain on the conversion isn't recognized under Code Sec. 1033(a)(1), the basis of the property received is the basis of the converted property (1) decreased by the amount of any money received that was not spent acquiring similar property, and (2) increased by the amount of gain recognized, or decreased by the amount of loss recognized.
- Where the taxpayer's property is involuntarily converted into money or other property that isn't similar or related in use to the converted property and, within the prescribed period, the taxpayer purchases other property that is similar or related in service or use to the converted property, and elects not to recognize any part of the gain, the basis of the replacement property is its cost, reduced by the amount of gain that is not recognized.
- If more than one piece of property is bought as a replacement, the basis (cost less non-recognized gain) is allocated to each piece in proportion to its respective cost.
- Sandy affected persons are currently exempted from the requirements of the federal securities laws with regard to the Exchange Act filing requirements for the period from Oct. 29, 2012 to Nov. 20, 2012, provided that the filer disclose the reasons why, in good faith, he/she cannot file on a timely basis
- CPA licensees whose registration renewal is due in November or December 2012, and who are unable to complete required coursework due to the storm, will have until February 1, 2013 to meet their requirements.
- CPE earned in January 2013 may be applied to either 2012 or 2013.
401(k) Hardship Distributions
- In response to Hurricane Katrina, the IRS liberalized the safe-harbor hardship withdrawal rules for certain hurricane-related withdrawals. Under the relief, plans could rely on participants' representations regarding the need for, and amount of, hardship withdrawals and the requirement for post-distribution contribution suspensions was eliminated. IRS/Congress may still make this determination for Sandy.
- Generally, distributions from a 401(k) plan while you're still employed and before you reach age 59 ½ are not permitted. However, if the plan provides for hardship distributions, and you can show that you have an immediate and heavy financial need, then you may be entitled to a distribution of funds necessary to meet your obligation. A distribution of “elective contributions” to a cash or deferred arrangement (CODA, also known as a 401(k) plan) is on account of hardship if the distribution:
- (1) is made on account of an immediate and heavy financial need of the employee, and
- (2) is necessary to satisfy that need.
- The determination of the existence of an immediate and heavy financial need and of the amount necessary to meet that need must be made in accordance with nondiscriminatory and objective standards set forth in the plan