AMENDED RETURNS FOR NATURAL DISASTER LOSSES
The paperwork to submit refund claims for disaster losses is not burdensome. Form 1040X can amend a prior year’s return without complicated red tape. It merely asks for an explanation of the loss (the figures go on an accompanying Form 4684) and computation of the refund due. Include specific information about the time, place and nature of the disaster that caused the loss.
To speed up processing of the refund, the IRS recommends putting the disaster designation prominently in red ink at the top of the 1040X, with a notation such as: "Louisiana disaster area claim — Hurricane Ike."
Take the entire deduction in a single year; splitting the deduction between, say, 2007 and 2008 is a no-no. Approval of a refund claim does not preclude a subsequent examination of your return. Hence, amending for any reason may prompt the IRS to question other return items or, worse yet, other returns. The usual three-year deadline for submitting amended returns does not apply to disaster-related losses. Instead, the deadline for amending the prior year return is the current year return’s due date -- April 15, unless the 15th falls on a Saturday or Sunday. But the law authorizes the IRS to extend the deadline, something that it routinely does.
NET OPERATING LOSSES FOR CASUALTY OR THEFT
Special rules apply when a casualty or theft loss deduction is more than your entire income for the year of loss and you pay no tax. If this is the case, check on whether you fall under the often overlooked carry-back and carry-forward provisions of the rules for net operating losses (NOLs).
The law does not require that you be in business to have a NOL from a casualty or theft loss. The excess loss can be used to recover or reduce taxes paid in other years. The personal NOL rules allow an unused loss to be taken as an additional deduction for the three prior years -- versus only two for a business NOL -- and then for the 20 following taxable years. Note that the 2008 law changes increase the carry-back to five years for federally-declared disasters that occur during 2008 and 2009.
Alternatively, you can elect to forgo the entire carry-back and just carry forward the excess amount for 20 years until it is used up. As a general rule, the election will be advisable if a greater tax savings results from a carry-forward rather than a carry-back.
Julian Block is an attorney based in Larchmont, N.Y. This article is excerpted from his book, "The Home Seller’s Guide To Tax Savings: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum."
