Did We Survive Hurricane Katrina or Not?: Got a grant? Uncle Sam wants you!
Over the last few days I've noticed quite a bit of traffic heading to this site in search of information about the IRS and Katrina grants. (It is April, afterall.) Therefore, it would probably be a good idea to update the blog as far as what we're doing about our improperly calculated casualty loss and the resulting taxes due for our grant as income.
Fortunately, the update is simple: We have let our previous returns stand. After batting options around for a while we feel it's just in our best interest to let it go and chalk it all up to experience. Hopefully, knowing how to properly claim a loss greater than five years of income for tax purposes will not be experience we will ever need again in our lifetime... but you just never know. Trust me - you really just never know.
There were also a couple of anonymous comments made on the original post which raise a few points worth noting - or which raised some questions which should be answered.
"Please be aware that there were mainly two types of casualty losses that you could have taken after Katrina: Personal property and Real estate. The MDA grant program only pays for the Real estate portion and more specifically the "structure" of your house. Personal property in the house includes things such as furniture, appliances etc. The real estate portion includes things like drywall, built in cabinets etc. So unless you claimed real estate and the structure as a loss, you are fine. If you did take a casualty loss on the real estate portion then by the IRS rules, because the MDA grant is for structure only, you include that amount of reimbursement against the amount you claimed as a loss against the structure of the house."
I totally wish that whoever wrote this comment was our CPA. You see - THIS makes sense. Since the grant only reimbursed us for 'structural damage' then this amount should have only been applied to the 'structural damage' portion of our previously reported loss. Then everything may have worked out had we calculated our loss against the structure of the house correctly. Unfortunately, our accountant didn't do this. Make sure yours does. In our case, however, I don't think it would have mattered as the grant far exceeded the structural loss we claimed.
"Let me clear up some things for you. First, you should NOT have amended your previous returns. The IRS clearly states that you cannot do this. You simply report the amount of your grant as other income in the year you receive the grant. You only report an amount that is equal to the amount of casualty loss you took on your structure. "
Again -- someone else making perfect sense. I'm addressing this portion of this comment to clear something up however... Our accountant amended our return (for 2006, I believe) because we did receive grant proceeds during that year but they were not reported as other income at that time as they should have been. (We received grant proceeds during two different tax years.)
"You may think you understated your casualty loss, but you may not have. Your casualty loss is based upon what you have invested in your house. It has nothing to do with how much your house is actually worth. People that owned their house for 20 or 30 years really got cheated by the IRS on their casualty loss. The grant however, is based upon the insured value of your house plus 35%. This is why a grant is often more than your claimed structural casualty loss."
And I thought this was worth posting here because this poster brings up an excellent point. If I'm understanding this correctly - this would mean that if you only paid $60,000 for your house 30 years ago -- it really doesn't matter what your house is 'worth' today as far as this loss thing goes -- there's going to be a big disparity between loss and grant.
All is quiet on the tax front here now and any clerical and posting errors have been corrected (When we made our payment to be applied to the 2006 tax year it was instead applied to 2007 as an overage - thus the scary letters telling us we still owed money). We really appreciate the peace and quiet - and plan on hanging on to it.
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