Dear Clients and Friends:

The President recently declared parts of this area as a disaster area eligible for federal assistance. While I hope that you haven't been a victim, you should be aware that if you suffered a loss as a result of the disaster, you might be able to recoup a portion of that loss through a tax deduction. Moreover, you can elect to claim the loss in either of two years.

Losses from Presidential declared disasters could be deducted in the tax year in which the loss occurs or in the immediately preceding year. This option may increase the tax savings from the loss and may enable you to get a refund from the IRS before you even file your tax return for the year in which the loss occurred. For example, a loss that occurs this year can be claimed on this year's return, which won't be filed until early next year. But, if you elect to claim the loss last year (by claiming it either on your original return or an amended return), you can generally expect to receive the refund within a matter of weeks. This can help to pay some of the repair costs. To claim the disaster loss on your return for last year, an election statement must be prepared and attached to the return. The statement, which I can draft for you, must include specific information about the time, place and nature of the disaster that caused the loss.

Determining the most beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and applicable tax rates. For example, claiming the loss in the higher income year may not be the most advantageous approach. Because of a 10% of adjusted gross income (AGI) floor on casualty loss deductions, a larger amount of AGI will cut into your allowable loss deduction.

On the other hand, if the larger income, or a smaller amount of other deductions, pushes you into a higher tax bracket, the deduction becomes more valuable. For example, a $4,000 deduction saves $1,240 for a taxpayer in the 31% tax bracket. A $4,000 deduction is worth $1,440 to a taxpayer in the 36% bracket. In some instances, a taxpayer may wind up with a gain from a disaster loss, for example where insurance proceeds exceed the basis of the destroyed property. If that happens, there are several ways to exclude or postpone the tax on that gain. If you think you might be in a gain position, please let me know and I will go over the exclusion and deferment options.

A loss only qualifies for this tax break if the declared disaster caused the loss. So keep copies of local newspaper articles or photos that will help prove that your loss was caused by the specific disaster.

The loss must have occurred in the specific geographic area that was designated by the President as a disaster area. I know which areas these are. And I can determine if you have a deductible disaster loss, and make the necessary computations to properly advise you as to the most advantageous course of action.

If you have suffered a loss, which you think may qualify for this relief, or simply want more information on this issue, please call me. If you know someone (e.g., a friend or family member) who has suffered such a loss, I would be glad to review his or her particular situation with him or her. Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner