On February 20, 2021, President Biden declared a “major disaster” for Texas due to the severe winter storms that lasted from February 11 through February 20. The storm caused significant issues, such as loss of power and water, home damage, water pipe damage, and other related issues.
What relief is available to victims of the storms?
Individuals who had a significant financial event due to the storms, such as home or water pipe damage, can obtain assistance through FEMA. (Note that individuals with insurance coverage should make an insurance claim first, as FEMA only provides relief if insurance doesn’t.) Individuals who need specific items, such as food, drinking water, and shelter, can obtain help from the North Texas Food Bank, Food Bank of the Rio Grande Valley, and various other organizations, all of which have obtained additional resources from recent fundraising drives.
If Texas residents can’t get reimbursed for their losses via insurance or FEMA, some relief may be available via their tax returns, specifically via casualty loss rules on Schedule A, Itemized Deductions.
Although the Tax Cuts and Jobs Act of 2017 (TCJA) made it harder to claim casualty losses on tax returns, affected Texans may be able to do so.
Casualty Losses prior to the Tax Cuts and Jobs Act of 2017
Prior to TCJA:
- An individual could claim a deduction for a financial loss, such as a stolen car or computer, burst water pipe, or homeowner damage due to a natural event, such as a tornado or flood, as a “casualty loss” on Schedule A via IRS Form 4684.
- The amount of the casualty loss would be either (1) the adjusted basis of the property affected (most commonly, original cost less depreciation) or (2) the reduction in fair market value that the property sustained due to the casualty loss.
- Individuals could deduct only the amount of loss that exceeded 10% of their adjusted gross income. Note that to receive a tax benefit from the casualty loss deduction, individuals’ overall itemized deductions had to be greater than their standard deduction. This was the case for many homeowners pre-TCJA.
- The amount of the loss was reduced by $100 for each separate casualty loss event reported.
Casualty Losses after the Tax Cuts and Jobs Act of 2017
Now, after TCJA, the rules are more restrictive:
- An individual can only deduct casualty losses that occur in a Federally Declared Disaster Area, i.e., the President of the United States must declare a disaster.
- Like before, only the loss in excess of 10% of adjusted gross income can be deducted. Also, as before, in order to benefit from the casualty loss deduction, an individual must itemize deductions instead of claiming the standard deduction. Since TCJA, itemizing has become less common. TCJA significantly increased the standard deduction amount, and since itemized deductions only make sense if the total itemized amount exceeds the standard deduction, fewer homeowners are now claiming itemized deductions.
- The $100 reduction-per-loss rules still apply.
Since the storms ended on February 20, several options for tax relief have been made available to Texas residents:
- Texas residents may now qualify to claim casualty losses on their tax returns. President Biden’s declaration of a Federal Disaster means that affected Texas residents now have the ability to claim casualty losses on their tax returns if they are not reimbursed by insurance or FEMA.
- Texas residents have the option of declaring the loss on their 2020 or 2021 tax returns. Texas residents who have not yet filed their 2020 tax return and cannot obtain relief under insurance and FEMA should consider monetizing their loss and declaring it on their 2020 tax return instead of waiting to file their 2021 tax return in 2022.
Texans can even deduct the loss without committing financially to making the repair in 2021. For example, let’s assume a water tank froze in a Texas attic during the storm and then burst, creating significant flooding and subsequent mold. The homeowners immediately addressed and paid for the flooding but did not deal with the mold issue until 2022. So long as the homeowners can monetize the loss, they can take a casualty loss either on their 2020 or 2021 tax returns.
Texans who wish to claim a casualty loss on their tax returns due to the severe winter storms will need to enter FEMA declaration number 4586 on their tax returns.
- Texas residents get an automatic 2-month extension to file their 2020 tax returns and make payments. On February 22, 2021, the IRS announced a reprieve for Texas residents on their 2020 tax returns. All residents of Texas will be allowed to file their 2020 tax returns by June 15, 2021, instead of by April 15, 2021. In addition, the due date for their 2021 first quarter estimated tax payments has also been pushed back from April 15, 2021, to June 15, 2021.
More tax relief may be on the horizon.
Texas residents should keep an eye out for a renewed or second “Taxpayer Certainty and Disaster Tax Relief Act.” This first act applied to Federally Declared Disasters in 2018 through January 19, 2020. It removed the 10% adjusted gross income rule and increased the per-event reduction from $100 to $500. Should a renewed or second version be passed, Texas residents could obtain significantly larger deductions for their casualty losses from the storms, and an even greater number of Texas residents would potentially qualify.