Bailout package offers tax relief for storm victims

For those who thought they were out of luck when faced with storm damage repair costs, think again. As a result of federal tax law changes passed last October, many people will actually be able to recoup some of the money spent on those repairs, including damage from Hurricane Ike and the recent winter ice storm.

By law, the casualty loss deduction for federally declared disasters is no longer limited by 10 percent of adjusted gross income in 2008 and 2009, explained Faith Crump, CPA, tax manager at Cotton + Allen. "Before, an individual had to experience significant monetary losses to be eligible for the deduction," she said. "Now, so many more people will be able to use this deduction to reduce their taxes."

The Emergency Economic Stabilization Act of 2008, commonly referred to as a bailout of the U.S. financial system, provides tax relief for victims of federally declared disasters occurring in 2008 and 2009. "That means that taxpayers in Kentucky and Indiana who have expenses related to recent storm damage will likely benefit from the rescue plan," said Crump. "While the primary purpose of the legislation was to solve the credit crunch in the financial markets, it also served as one of the largest tax bills in recent years."

In order to gain the needed support in Washington to pass the legislation, Congress added numerous tax provisions to the bill which are favorable to individuals and businesses. The new law includes nearly 300 changes to the Internal Revenue Code and provides tax relief to victims of federally declared disasters occurring after December 31, 2007, and before January 1, 2010. To date, Kentucky has had four federally declared disasters with two including Jefferson and surrounding counties. In Indiana, there have been three declared disasters, including one in Clark, Floyd, Harrison and surrounding counties.

"The bottom line for individual taxpayers is that there are less restrictions in calculating deductions, which helps reduce the amount of taxable income," explained Crump. "Individuals can also combine damages from 2008 with the 2009 ice storm on their 2008 taxes, which may encourage people to go ahead and make those storm-related improvements to their property."

For storm victims, there are several tax issues that should be considered, such as determining the year in which to take the loss, the benefit of married individuals filing separately, valuation of the property, limitations and adjustments to the loss and finally the tax consequences of any insurance reimbursements or recoveries.