Louisianans hit by floods in 2016 will want to dust off their old tax returns from that year to tap new deductions and cash in on hundreds of millions of federal tax relief dollars for those who saw homes, cars and other property ruined by rising waters.
Two changes wrapped in December’s GOP-backed tax cuts will let those hit by that year’s devastating March and August floods write off far more of their losses on their returns — even if they didn’t itemize their deductions — and get refunds on penalties for tapping retirement savings to rebuild.
About $500 million in federal taxes paid by Louisiana flood victims in 2016 is up for grabs and will head back into residents’ pockets, according to estimates from the Congressional Budget Office. That’s only if all eligible Louisianans eligible take the time to file the paperwork and claim their refund checks.
And while this year’s tax filing deadline looms in less than a month, flood victims actually have until April 15, 2020, to amend their 2016 returns and claim the refunds, according to tax professionals who spoke with The Advocate this week.
“They got plenty of time to do it,” said Gerard “Jerry” Schreiber Jr., of Schreiber & Schreiber CPAs in Metairie.
Because of a change passed by the Louisiana Legislature earlier this year during an otherwise unproductive special session, flood victims taking advantage of the newly available federal disaster tax relief won’t have to adjust their state returns or pay any more in state income tax, said Brandon Lagarde, tax director at Postlethwaite & Netterville in Baton Rouge.
Louisiana residents hit by more than $500 in losses during the 2016 floods that weren’t covered by insurance payouts or government grants can now deduct those expenses from their federally taxable income. That’s a significant change from past tax rules, which imposed much higher limits on the amount of uncompensated losses — known as “casualty losses” — victims could write off.
Regular federal tax rules also limit “casualty loss” deductions to those itemizing their returns. But the tweaked federal rules open it up to flood victims who took the standard deduction as well, likely giving a tax break to renters and many lower- and middle-income Louisianans who didn’t benefit from the “casualty loss” deduction when they filed their 2016 return the first time around.
“That’s a big deal,” said Lagarde.
The easiest way for a homeowner to calculate the size of their casualty losses is to add up how much they ended up paying out-of-pocket to fix their homes and replace what was destroyed, said Schreiber. Flood insurance payouts and government grants count against that figure, Schreiber said, but flood victims shouldn’t count the value of loans taken out to rebuild because those funds eventually have to be paid back.
“Cost to repair is a good estimate,” said Lagarde, who added that those amending and refiling will likely want to have some sort of documentation — construction bills, receipts or estimates — to back up their claims.
For a Baton Rouge family who took on several feet of water and lost cars, televisions and furniture in the flood, the new deductions could mean a sizeable new refund on their 2016 taxes. For example, suppose that family shelled out $125,000 to repair their home and replace their belongings — but flood insurance payouts and grants from the Restore Louisiana program sent them only $90,000, leaving an uncompensated gap of $35,000.
Previous federal tax rules limited taxpayers to claiming only casualty losses that amounted to more than 10 percent of their income. If this flood-hit family earned $100,000 in 2016, that’d mean they couldn’t write off the first $10,000 in losses on their federal taxes and could only claim a $25,000 deduction. But by amending and refiling their 2016 return, that same family can now claim another $10,000 deduction and significantly drop their bill.
For those who suffered major losses and didn’t have insurance, the increased deductions could add up to thousands — or even tens of thousands — of dollars back from the federal government, according to staffers in U.S. Sen. Bill Cassidy’s office.
The IRS will refund the difference between what Louisiana taxpayers paid in 2016 and what they now owe under the revised rules.
The other new provision available for Louisiana flood victims will allow anyone who pulled cash out of retirement accounts early — such as 401(k)s — to rebuild their homes to get back a 10 percent penalty slapped on those withdrawals, said Lagarde.
Normally, pulling cash out of a retirement accounts before hitting the minimum age incurs a 10 percent penalty and that person is forced to pay federal income taxes on the entire withdrawal. For someone taking out $70,000 to fix up a badly damaged home, for example, that’d amount to a $7,000 penalty and a taxable income that would likely knock the taxpayer up several brackets.
By amending and refiling their 2016 returns, that person could now get the entire penalty refunded — and spread out the $70,000 in taxable income over three years, dropping the amount of federal income tax they owe and likely keeping them in a lower-percentage bracket, Lagarde said.
U.S. Rep. Garret Graves, R-Baton Rouge, said he’s spoken with many flood victims in his district worn out by the stacks of paperwork and “fatigued by the bureaucracy” they’ve had to wade through since the flood.
But a lot of money is potentially at stake for Louisiana flood victims who take the time to send in amended returns, Graves said.
“This is literally hundreds of millions of dollars in federal money that’s out there waiting for people to, effectively, apply for it,” Graves said. “It really is important for people to do this.”
Graves, Cassidy and U.S. Sen. John Kennedy, R-Louisiana, hosted a Tuesday night teleconference to answer questions about the tax changes. Cassidy mailed cards to about 100,000 Louisiana residents alerting them to the changes and urging them to refile.
Tax professionals can walk taxpayers through the refiling process, which involves filing an IRS form 1040X. Those who used online filing services like TurboTax can also use those to amend their previous returns.
Similar post-flood tax breaks have been extended for victims of other disasters —including 2005’s Hurricane Katrina — but require individual congressional approval. Inclusion of federal tax relief for 2016 Louisiana flood victims came after more than a year of furious work by the state’s senators and congressmen.
“When working on the tax cut bill, including this disaster tax relief was my top priority,” said Cassidy, who sits on the Senate committee that wrote much of the GOP’s tax legislation. “The ability to refile 2016 tax returns with the deduction for uncompensated losses can mean thousands of dollars for these recovering families.”