Can You Claim a Casualty Loss for Tax Purposes?

Brady Ware Co. writes: Casualty Loss Basics  Question: My home suffered major damage after a horrible storm. Do I get a tax break for a disaster like this?

Answer: Possibly. When a natural disaster–such as a tornado or hurricane–strikes your home or business, the results can be devastating — especially if the losses aren’t fully covered by insurance or your insurance claim is contested.

Fortunately, you may be able to get help from Uncle Sam by claiming a casualty loss deduction on your tax return. If your region is officially designated as a “presidentially declared disaster area” you don’t even have to wait until you file your next tax return. You may be able to file an amended return for last year and get a quick tax refund for fast financial relief.

Claiming the loss on a return for last year will get you an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

If you suffer a casualty or theft loss, you generally may deduct the amount of your unreimbursed loss only to the extent that your losses for the year exceed 10 percent of your adjusted gross income (AGI) for the year. (Special rules apply to losses in federal disaster areas.) Before the 10 percent limit is applied, you must subtract $100 for each casualty or theft occurrence.

Casualty Loss Tax Deduction Example

Let’s say the storm damage to your home is estimated at $200,000. But the insurance only covers $150,000. Your AGI is $100,000. After subtracting $100, your deductible loss is limited to $39,900 ($50,000 unreimbursed amount minus $100 minus 10 percent of your $100,000 AGI).

However, there are no limits on losses for business or income-producing property such as rental real estate. In other words, you can write off business losses without applying the 10 percent limit or the $100 per casualty amount applied to personal losses. So if your business suffered $50,000 of damage that was not reimbursed by insurance, the entire amount would be deductible (assuming your tax basis in the damaged assets was at least $50,000).

To claim a property loss, for tax and insurance purposes, you must be able to prove that a disaster took place. Keep copies of newspaper clippings and police reports. Take photos or videos after a casualty. If you have any “before” and “after” pictures or videotapes, they can help back up casualty loss claims of the disaster. This kind of detailed documentation may also be necessary to get insurance reimbursement and to apply for FEMA grants and SBA loans.

In addition to compiling records and other proof, you may also have to substantiate the value of the property loss by getting an independent appraisal from a real estate expert. (The cost of the appraisal and the cost of obtaining photographs or videos may be deductible as a miscellaneous expense.)

When will Xero investors see reward?

James Hutchison for AFR / Smart Investor writes:   Shares in accounting software maker Xero plunged this week as investors globally sold down technology and other stocks that were deemed overvalued.

After hitting a peak of $42.20 – and valuing the company north of $4.5 billion – just a month ago, Xero shares hit $29.20 shortly before the market closed on Tuesday.
This caps off a 20.5 per cent slide in the past week alone, indicating the Auckland-based company won’t be shielded from fears that tech companies are trading above their worth.

The global sell-down comes at a bad time for Xero, which last week announced a significant increase in customer numbers and revenues but a doubling in losses for 2013 as the ­software maker pumped any earnings back into its aggressive expansion in Australia and the United States.

Though executives have maintained that investors understand the need to invest at the expense of short-term profitability, the recent sell-down indicates perhaps the market isn’t so sure.

Of course, those who bought into the company early into its listing on the Australian Securities Exchange are still sitting pretty, with shares increasing 520 per cent since November 2012.

Yet the question remains as to when investors will see dividends from their investment. Analysts don’t expect Xero to start showing positive earnings until 2016 at the earliest, and this week said customer numbers weren’t growing as quickly as hoped. Observers say Xero is trading far above where it should sit.

“The excitement that was expressed in the share price above $40 was entirely understandable if a little over-enthusiastic,” said Michael McCarthy, chief markets strategist at CMC.

“It’s like being back in 2000 – we know there’s potentially a very good business here. It looks like they’ve found a path to it. Now the question is: can they deliver? . . . I suspect we’ll see further price falls before this stock settles.”

This story originally appeared at afr.com.au

Ten Facts about Amended Tax Returns

Did you discover that you made a mistake after you filed your federal tax return? You can make it right by filing an amended tax return. Here are the top ten things to know about filing an amended tax return. 

1. Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct errors on your tax return. You must file an amended return on paper. It can’t be e-filed.

2. You usually should file an amended tax return if you made an error claiming your filing status, income, deductions or credits on your original return.

3. You normally don’t need to file an amended return to correct math errors. The IRS will automatically make those changes for you. Also, do not file an amended return because you forgot to attach tax forms, such as a W-2 or schedule. The IRS will usually send you a request for those.

4. You usually have three years from the date you filed your original tax return to file Form 1040X to claim a refund. You can file it within two years from the date you paid the tax, if that date is later. That means the last day for most people to file a 2010 claim for a refund is April 15, 2014. See the 1040X instructions for special rules that apply to certain claims. 

5. If you are amending more than one tax return, prepare a 1040X for each year. You should mail each year in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. Check the form’s instructions for where to mail your return.

6. If you use other IRS forms or schedules to make changes, make sure to attach them to your Form 1040X.

7. If you are due a refund from your original return, wait to receive that refund before filing Form 1040X to claim an additional refund. Amended returns take up to 12 weeks to process. You may spend your original refund while you wait for any additional refund.

8. If you owe more tax, file your Form 1040X and pay the tax as soon as possible. This will reduce any interest and penalties.

9. You can track the status of your amended tax return three weeks after you file with ‘Where’s My Amended Return?’ This tool is available on IRS.gov or by phone at 866-464-2050. It’s available in English and in Spanish. The tool can track the status of an amended return for the current year and up to three years back.

10. To use ‘Where’s My Amended Return?’ enter your taxpayer identification number, which is usually your Social Security number. You will also need your date of birth and zip code. If you have filed amended returns for multiple years, select each year one by one.

Additional IRS Resources:

• Tax Topic 308 - Amended Returns
• FAQs about Amended Returns & Form 1040X
• 1040 Central
• IRS Tax Map

4 Top Ways to Avoid Tax Pain at Retirement

Dan Ritter for Wall St. Cheat Sheet writes: Retirement costs money — an enormous, mind-boggling amount of money. Here’s a thought exercise for some context.

Imagine you are one of the lucky few college graduates that rolls out of the diploma mill and into a well-paying job, and at age 24 you’re earning a handsome $50,000 per year. Being financially savvy, you save 10 percent of your income each year. For the next 43 years, you remain consistently employed, you receive regular raises, your investments achieve satisfactory returns, and there are no financial catastrophes. This is about as good as it gets, and by age 67 you’re sitting on a nest egg worth nearly $1.4 million (keep in mind that this is a fantasy scenario for most Americans, who are woefully underprepared for retirement).

This, combined with Social Security (assuming it’s still around in 43 years), is the money that will be available to you through a retirement fund that is expected to last about 20 years. And to be clear, this is probably enough — well within the “comfortable” zone that is targeted by many financial planners, who advise people to replace at least 70 percent of their pre-retirement income in retirement. Those who are bullish tend to shoot higher, targeting closer to 100 percent of pre-retirement income or more, depending on how well investments are performing.

In this scenario, between the the two income sources, you’re still earning a six-figure income throughout retirement. And with the notable exception of Roth-style savings vehicles, most income sources in retirement are taxed. This includes withdrawals from a traditional tax-deferred 401(k) or IRA as well as Social Security receipts and most pension payments.

As at any interface with the Internal Revenue Service, savvy financial planners have developed strategies to reduce this tax friction. Just as ”most investors are familiar with the idea of maximizing their assets by minimizing taxes during their earning and wealth-building years,” says Ken Hevert, vice president of retirement products at Fidelity, “limiting taxes on those savings in retirement is equally important.” Here are some strategies outlined by Fidelity to do just that.

1. Get the withdrawal formula right

In general, according to Fidelity, you want to keep things as simple as possible — and sometimes, the simplest withdrawal strategy can be the most effective. Fidelity recommends that retirees make withdrawals from their accounts in the following order:

1. Minimum required distributions (MRDs)
2. From taxable accounts
3. From tax-deferred accounts
4. From tax-free accounts

Satisfying minimum required distributions is fairly straightforward. In exchange for all those tax incentives that your IRA and 401(k) receive, the IRS wants you to actually, you know, use the money you so prudently saved. When you reach the age of 70.5, you’re required to withdraw a certain amount of money from your retirement accounts each year, or face financial penalties. MRDs do count as taxable income, unless they are made from things like Roth accounts.
From here, you want to try to ensure that any assets you have in tax-free accounts remains there as long as possible. The last thing you want late in retirement is to be wrestling with Uncle Sam over your tax liability, especially if you face increasingly large medical costs that require increasingly large withdrawals.

2. Be aware of the Social Security tax formula

Up to 85 percent of your Social Security benefits are subject to taxation, depending on how much money you make. Here’s the tricky thing, though: When you start claiming Social Security benefits, half of those receipts count toward your “combined income,” which is what the IRS will use to determine how much of your Social Security it wants to take back. The combined income equation is your adjusted gross income, plus nontaxable interest, plus that half of Social Security receipts.

For a single filer, if this comes out to more than $25,000 per year, you will owe some taxes on up to 50 percent of your entire Social Security income — if it comes out to more than $34,000, you will owe taxes on up to 85 percent of your benefits.

3. Tax brackets matter, especially in the long run

It can be hard, but ideally you would like to have a very good idea of your expenses in retirement (as you would at any other point in life). While most working people don’t have throttle-like control over how much income they receive in any given year, retirees with well-funded nest eggs can, if they choose, make enormous withdrawals. Larger withdrawals, of course, can bump you into a higher tax bracket, which is contrary to the idea of reducing tax friction as much as possible.
One way some people choose to manage their retirement income is by targeting a marginal tax rate. This generally means never withdrawing more than a certain amount of money from taxable accounts in any given year.

4. Keep an eye out for selling opportunities

There’s one nice thing about the capital gains tax: If you’re in a low enough income tax bracket, it doesn’t exist. At least, it doesn’t exist as far as you’re concerned. The laws dealing with capital gains are constantly changing, but in 2014, those in the 10 percent and 15 percent income brackets could realize long-term capital gains, such as from the sale of stock, without being taxed.
If you have some assets you want to get rid of, doing so instead of making large withdrawals could actually be a good way to limit your overall tax liability.

The author, Dan Ritter, can be followed on Twitter Here.

Roth or Traditional IRAs: What's Best for Retirees?

Thomas and Robert Fross for Forbes write: Individual Retirement Accounts are one of the most popular ways to save for retirement. The two main types of IRAs are Traditional and Roth. As Americans approach retirement, it’s common to ask: which IRA is right for me?

Briefly, Traditional IRAs allow you to make pre-tax contributions – which may be deductible on your federal taxes – that grow tax-deferred and then are taxed during your retirement at your future tax rate. Roth IRA contributions are made after tax, do not qualify as deductions, and grow tax-free. Once certain aging requirements are met, distributions from Roth IRAs are not federally taxed.

Thomas: For retirees who expect their tax bracket to be lower during retirement, a Traditional IRA may be a better choice if they are still working. This way, they can make pre-tax contributions to a Traditional, potentially qualify for the deduction, and then pay taxes on distributions at their lower retirement tax rate.

Robert: Agreed. Clients in this scenario should also consider whether they are eligible to contribute to a Roth IRA. If their income exceeds a certain limit, they may not be eligible to contribute to a Roth that year.

If you are already retired, but still earning income, you need to consider the age limits placed on IRA contributions. Roth IRAs have no age limit on contributions (as long as you can show earned income,) but you cannot make a participant contribution to a Traditional IRA after your 70^th year.

Thomas: Many retirees maintain both types of IRAs. If you are eligible to contribute to both, you may split your contributions between your Roth and Traditional IRA. Under this strategy, it’s common to contribute the deductible amount to your Traditional IRA and the balance to your Roth; however, keep in mind that your total contribution still cannot exceed your limit for that tax year. It’s also important to consider the extra costs associated with maintaining multiple accounts.

Robert: Another strategy you may have heard of is a Roth conversion, which allows you to convert a Traditional IRA into a Roth by paying taxes on your contributions and earnings. This is frequently done during periods of market decline or when your tax bracket falls. The tax and financial implications of a conversion can be complex and it’s important to consult a financial advisor who can help you understand if a conversion may be right for your needs.

Thomas: For many taxpayers, the choice comes down to whether or not they are eligible to deduct their Traditional IRA contributions on their federal taxes. This depends on whether you are an active participant in an employer-sponsored retirement plan.  If not, then you may be able to deduct the full amount of your contribution. The rules regarding active participant status are tricky and it’s best to consult a tax advisor who can help you understand your personal situation.

Solutions:

As with most retirement topics, there’s no simple answer about which IRA is best for you. From a general tax perspective, a Roth may be a better choice if you do not expect your tax rate in retirement to be lower than your current rate; this will allow you to pay taxes on contributions now and receive tax-free distributions during retirement, when your taxes may be higher. On the other hand, if you expect that your tax rate will be lower in retirement, contributing to a Traditional IRA may be a smart option if you can receive a tax deduction now when your taxes are higher.

Ultimately, knowing which IRA suits your needs depends on a careful evaluation of the short-term and long-term benefits of each and an understanding of your current and future financial situation.

Securities and advisory services offered through SII Investments, Inc., member FINRA, SIPC and a Registered Investment Advisor.  Fross and Fross Wealth Management and SII Investments, Inc. are separate companies.  SII does not provide tax or legal advice.

You can visit the website of the authors, Fross and Fross Here.  You can Follow Fross and Fross on Twitter Here.