Tax Implications for California Wildfire Survivors. ABA Tax Section February 10, 2018

Transcription

1 Tax Implications for California Wildfire Survivors ABA Tax Section February 10, 2018

2 Panelists James Creech Law Offices of James Creech San Francisco, CA Bruce McGovern Professor of Law and Director, Tax Clinic South Texas College of Law Houston Andrew VanSingel Disaster Legal Services, ABA Young Lawyers Division Chicago, IL Moderator: Christine Speidel Staff Attorney and Director, Low Income Taxpayer Clinic Vermont Legal Aid, Springfield, VT 2

3 Topics 1. Preventative measures before a disaster occurs 2. The role of the ABA and attorneys in disaster recovery 3. Lessons learned 2017 Hurricanes and California Wildfires 4. Common tax issues that arise from natural disasters 5. Recent disaster-related tax legislation The Disaster Relief and Airport and Airway Extension Act of 2017 ( 2017 Disaster Relief Act ), Pub. L. No , signed by the President on September 29, Tax controversy issues 3

4 Keep Records, and Keep them SAFE Some clients may keep sufficient records, but they may not think to keep them safe! Consider what vital documents mean for your client EITC filers may want to retain qualified child related docs (school records, medical records, public benefit applications) Self-employed filers may want to retain bank statements and develop system for retaining business expenses 4

5 Technology Evernote web based digital notebook and recordkeeping Google Photo unlimited photo storage (a picture is worth 1,000 words, and maybe even 1 deduction) Box cloud based storage, free accounts up to 10GB Old School - Thumb Drive, filing cabinet 5

6 You May be Affected as Well Develop and understand a disaster plan Address how to communicate with co-workers and access documents How / where to regroup after a disaster Use a web-based case management system to prevent loss of continuity Go paperless, but back up electronic data 6

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8 Post-Disaster Role of the ABA and Attorneys 1. What attorneys can do after a disaster 2. The ABA s Disaster Legal Services program 3. FEMA benefits 4. Resources 8

9 What Attorneys Can Do After a Disaster Assist disaster survivors with outreach and education Partner with agencies already doing recovery work FEMA Disaster Relief Centers Red Cross shelters and mobile response units Government & non-profit events Critical messaging Beware of scammers Retain and reconstruct Continue with filing and reporting obligations 9

10 Disaster Legal Services Began in 1969 in response to Hurricane Camille Operates pursuant to a MOU between the ABA, and FEMA, administered by the ABA Young Lawyers Division Provides FREE legal assistance to low income persons affected by a presidentially declared major disaster Volunteer attorneys and law students assist with a wide range of legal issues (for non-fee generating cases) million FEMA registrations in 11 states/territories (FL accounts for 2.7 million) 10

11 DLS must be requested by FEMA: Incident/Disaster Presidential Declaration Disaster Legal Services Request for Individual Assistance (IA) Letter of intent from FEMA to ABA Once DLS is requested, the YLD will: Activate disaster hotline and issue press release Coordinate with local attorneys & service providers Participate in periodic coordination calls with FEMA and other strategic partners 11

12 Important (not all) FEMA Benefits Crisis Counseling Disaster Case Management (DCM) Disaster Unemployment Assistance (DUA) Disaster Legal Services (DLS) Critical Needs Assistance (CNA) immediate $500 payment Transitional Sheltering Assistance (TSA) short term hotel vouchers SBA Loans (capped at 200k for real property; 40k for personal property) National Flood Insurance Program (NFIP) 12

13 Resources National Disaster Legal Aid Online Disaster Legal Services Program of the ABA YLD ABA Standing Committee on Disaster Response and Preparedness Volunteer Organization Active in Disasters (VOAD) FEMA s Individuals & Households Program fact sheet 13

14 Lessons Learned 2017 Hurricanes and California Wildfires 1. To get access to those affected by natural disasters, move quickly once the disaster occurs. 2. Realize that disaster survivors will not be thinking about tax issues in the immediate aftermath. Tax issues will become more important during the filing season. 3. In the early stages of a natural disaster, the main feasible objective is to heighten awareness of tax issues and available resources. 14

15 1. Receipt of disaster-related payments, aid, or loans. 2. Receipt of insurance proceeds. 3. Deductions for damage to homes, household contents, and vehicles. 4. Filing deadlines. Common Disaster-Related 5. State tax considerations. Tax Issues 6. Other post-disaster tax issues 15

16 Receipt of Disaster-Related Payments, Aid, or Loans The following common types of relief to assist with disasterrelated costs are not taxable: a) Cash gifts or grants b) Household and cleaning supplies c) Clothing d) Emergency Food Stamps e) Temporary Living Assistance f) Labor Assistance g) Loans and Loan Subsidies Amounts (other than loans) received from an employer are taxable unless the requirements of Code 139 are met. 16

17 Receipt of Disaster-Related Payments, Aid, or Loans Employer-provided relief assistance: Is taxable unless Code 139 applies Under 139, qualified disaster relief payment is not taxable. A QDRP includes a payment for reasonable and necessary expenses attributable to a qualified disaster for: a) Personal, family, living, or funeral expenses; or b) Expenses incurred for the repair, replacement, rehabilitation of a personal residence A qualified disaster includes a federally declared disaster. No double benefit: the exclusion of 139 is available to the extent expense is not otherwise compensated by insurance. Code 139 can apply to payments from employer to employee. See Rev. Rul

18 Receipt of Disaster-Related Payments, Aid, or Loans Disaster Unemployment Assistance from FEMA Is taxable Rationale: these amounts compensate for lost wages or income, which would be taxable had they been earned. 18

19 Receipt of Insurance Proceeds Insurance proceeds that meet both of the following requirements are not taxable: 1) Payments are for residential living expenses that are attributable to the loss of use or occupancy of property that is the disaster survivor s principal residence, such as: Hotel expenses, Rental expenses for suitable temporary housing, Cost of meals that would ordinarily be cooked at home, Extraordinary transportation costs, Repair, replacement, and rehabilitation expenses for the principal residence, and 2) Payments are received during the period of loss of use or occupancy, which usually is the period of repair or replacement of the damaged principal residence 19

20 Receipt of Insurance Proceeds Insurance proceeds are taxable for an individual or business if they are for: Mortgage Payments Lost wages/income Lost rental income Lost business profits 20

21 Receipt of Insurance Proceeds Personal casualty gains are taxable Casualty gains result when insurance proceeds or other reimbursements exceed the adjusted basis of the property For example: Insurance payout of $100,000 AB of home is ($75,000) Casualty gain of $25,000 results 21

22 Receipt of Insurance Proceeds Avoiding taxation of personal casualty gains: If the taxpayer s principal residence is destroyed, the taxpayer may elect to exclude some or all of the gain realized. See Code 121. Single taxpayer can exclude up to $250,000 of gain Married filing jointly can exclude up to $500,000 of gain 22

23 Receipt of Insurance Proceeds If a personal casualty gain is taxable, a taxpayer may be able to exclude the gain by treating it as an involuntary conversion. See Code Taxpayer may elect not to recognize gains from involuntary conversions in current year but must purchase qualified replacement property within a specific time period (generally 2 years). To make the election: 1) Replacement property must be similar or related in service/use to the converted property, and Similar: depends on use of the property; business? personal? 2) Replacement property must be purchased within the applicable time period. 23

24 Deductions for Damage to Homes, Contents, and Vehicles For 2018 through 2025, the 2017 Tax Cuts and Jobs Act, 11044, amended Code 165(h) by adding 165(h)(5). Section 165(h)(5) eliminates the deduction for personal casualty losses. Despite the general disallowance, taxpayers can offset the amount of any personal casualty gains by the amount of otherwise-disallowed personal casualty losses. But 165(h)(5) does not apply to personal casualty losses arising in federally declared disaster areas. Losses in federally declared disaster areas are deductible. A federally declared disaster is one determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. 24

25 Deductions for Damage to Homes, Contents, and Vehicles In 2017 and prior years, taxpayers can take an itemized deduction for the aggregate amount of their personal casualty losses (to the extent they exceed personal casualty gains). 165(h). The taxpayer must show: 1) Type of casualty and date of occurrence, 2) The loss was a direct result of the casualty, 3) He/she was the owner of the property (or a lessee contractually liable for the damage), and 4) The amount of the loss Must report loss on Form 4684 and Schedule A of Form

26 Deductions for Damage to Homes, Contents, and Vehicles Prior-Year Election for Casualty Losses: Taxpayers generally report casualty losses in the year the loss occurred. However, Code 165(i) permits a taxpayer to elect to treat a loss in a federally declared disaster areas as occurring in the prior year. Example: a loss incurred in 2017 can be reported in Could generate an immediate refund. Prior-year election is made by filing an original or amended return. Taxpayers have until 10/15/18 to: Claim a 2017 loss by amending a 2016 tax return, or Claim a 2017 loss on a 2017 tax return. 26

27 Deductions for Damage to Homes, Contents, and Vehicles Calculating the Amount of a Casualty Loss: The amount of the loss is the smaller of taxpayer s: adjusted basis (AB) in the property or the decrease in the fair market value (FMV) of the property as a result of the casualty, Loss is reduced by any insurance or other reimbursement received or reasonably expected to be received Example: taxpayer paid $20,000 for a personal-use truck two years ago and it was worth $15,000 immediately before a fire. If the truck is totally destroyed by the fire, the amount of the loss is $15,000. If taxpayer receives insurance proceeds of $5,000 for the truck, the loss is only $10,

28 Deductions for Damage to Homes, Contents, and Vehicles Determining the decrease in property s FMV: The cost of repairing damaged property can be used as a measure of the decrease in FMV if all the following are met: 1) Repairs are actually made, 2) Repairs are necessary to restore property back to original condition, 3) Repair expenses are not excessive, 4) Repairs take care of damage only, and 5) Value after repairs is not more than the value of the property before the casualty 28

29 Deductions for Damage to Homes, Contents, and Vehicles Determining the decrease in property s FMV: Rev. Proc , I.R.B. 286 (12/13/17) Provides safe harbors for determining the decrease in FMV of personal-use residential real property and personal belongings. Some safe harbors can be used for all casualty losses. Additional safe harbors can be used for losses in federally declared disaster areas. Effective December 13, 2017 See also Rev. Proc , I.R.B. 290 (12/13/17) Provides additional safe harbor for personal-use residential real property damaged or destroyed as a result of Hurricanes Harvey, Irma, and Maria. 29

30 Deductions for Damage to Homes, Contents, and Vehicles Casualty loss deductions are limited A personal casualty loss is deductible only to the extent it exceeds: 1. $100, and 2. 10% of the taxpayer s AGI Amount of Casualty Loss $100 10% of taxpayer s AGI Itemized deduction for taxpayer 30

31 Deductions for Damage to Homes, Contents, and Vehicles A personal casualty loss is an itemized deduction. Reporting a casualty loss will benefit a taxpayer only if aggregate itemized deductions exceed the standard deduction. If itemized deductions do not exceed the standard deduction, the taxpayer will not benefit from reporting casualty losses and will take the standard deduction. [Note exception in 2017 legislation.] Standard Deduction Amounts Filing Status Single $6,350 $12,000 Married filing jointly $12,700 $24,000 Head of Household $9,350 $18,000 31

32 Filing and Payment Deadlines IR (10/31/17): relief from deadlines for those in areas affected by California wildfires. Relief available to individuals and businesses in several areas, including counties of Butte, Lake, Mendocino, Napa, Nevada, Sonoma and Yuba. Extends several due dates to January 31, 2018, including: 9/15/17 due date for certain returns 10/16/17 extended due date for 2016 individual returns. 10/31/17 due date for quarterly payroll and excise tax returns. 11/15/17 extended date for returns of calendar-year tax-exempts. 1/16/18 date for quarterly estimated tax payments. Relief is provided automatically; request abatement if not. 32

33 Filing and Payment Deadlines CA (1/17/18): relief from deadlines for those affected by the wildfires, flooding, mudflows, and debris flows that took place beginning on December 4, 2017, in parts of California. Relief available to individuals and businesses in several areas, including counties of Los Angeles, San Diego, Santa Barbara, and Ventura. Extends several due dates to April 30, 2018, including: 1/16/18 date for quarterly estimated tax payments. 4/17/18 due date for 2017 individual returns Due dates for most returns with an original or extended due date occurring on or after 12/4/17, and before 4/30/18, including: Returns of business organizations and estates and trusts Employment and certain excise tax returns Annual information returns of tax-exempt organizations Relief is provided automatically; request abatement if not. 33

34 Recent Legislation The Disaster Relief and Airport and Airway Extension Act of 2017 ( 2017 Disaster Relief Act ), Pub. L. No , signed by the President on September 29, 2017: 1. Employee retention credit 2. Access to retirement funds 3. Special casualty loss rules 4. Use of prior-year earned income for EITC and CTC 5. Increased charitable contribution limits Applies to those in areas affected by Hurricanes Harvey, Irma, and Maria Similar legislation was introduced in the House for areas affected by California wildfires, but has not been enacted. 34

35 State Tax Provisions Most states piggyback off the Federal tax laws for providing tax relief during and after a natural disaster (e.g., NOL carryback, casualty loss) States may provide other forms of relief: Delaying filing deadlines of state taxes Suspend late payment penalties Allow casualty losses as an above-the-line deduction Exempting from sales tax certain products needed for disasterrelated supplies Suspension of hotel sales tax Suspension of fuel tax 35

36 Other Tax Issues Arising Post Disaster Tax issues prior to the disaster can be made worse by the disaster: Flooding forces taxpayer to relocate out of state with family, but did they file a Form 8822 (change of address)? SNOD deadline is tomorrow; Harvey is today Documents for a Schedule C audit were neatly organized in a box on October 10, 2017, and conveniently located somewhere in Santa Rosa Non-Filer wants to get into compliance, but now does not have any records 36

37 Tax Controversy Issues Tax controversy issues include: 1. Substantiation of deductions 2. Reconstruction of records 37

38 Substantiation for a Disaster Controversy INDOPCO deductions are a matter of legislative grace Cohan Rule Credible testimony may establish a reasonable basis for allowing most deductions IRC 274 supersedes Cohan for certain categories of expenses (travel, meals, entertainment, listed property) Treas. Reg T(c)(5) suspends 274 and allows reasonable reconstruction where the records are lost or destroyed due to circumstances beyond the taxpayer s control 38

39 Reconstruction of Records Bank statement reconstruction analysis Cash deposits for the year are $30,000 and the prior two years business income is $28,000 and $24,000. Cost of living analysis Taxpayer s monthly expenses (rent, car, student loan, phone) are $1,800. We could conclude that the TPs income is at least $21,600. The Bank wants $300 to print 2 years of statements! Community Reinvestment Act Talk to the CRA officer In U.S. Tax Court, work with Counsel to have records subpoenaed wherever possible. Prior-year tax returns Form Fee waived for losses in presidentially declared disaster areas. 39

40 Thanks Special thanks to the Tax Clinic interns at South Texas College of Law Houston for assistance with this presentation: Omar Martinez Adam Matlock 40