Client Relationship & Service

Helping disaster victims with questions about taxes and financial matters

5 MIN ARTICLE

With firefighters still battling to contain the wildfires that have scorched neighborhoods across Los Angeles, victims have barely started to come to terms with their losses. Unfortunately this is true whenever and wherever disaster strikes. On top of the deep personal toll, victims face a maze of financial and logistical hurdles as they plot their next steps. That includes the challenges of submitting insurance claims, calculating taxes and rebuilding homes.

 

As a financial advisor, you may be called to answer questions on key financial matters. Here is a quick primer for people in affected areas, especially those who have been directly impacted by a disaster. For all the issues below, you can help your clients understand their situation and talk through potential options to discuss with tax, insurance and legal advisors. 

 

Insurance claims

For many victims in a disaster, filing an insurance claim may be a logical first step. Keep track of any expenses incurred since evacuating your home, such as hotels and meals, which could be covered by insurance. Keep records of all conversations with insurers and ask if additional information is needed. A good resource is your state department of insurance. 

 

Property tax relief

Counties will often defer property tax payments for victims whose property has been damaged. In Los Angeles County, property owners suffering damage may be eligible for property tax payment deferrals without penalty or interest. Individuals can ask for property tax reassessments, which can lower the taxes due. Generally, the reassessment will only apply to structures that are damaged or destroyed and not to the value of the land itself. For L.A. County, the forms requesting wildfire relief must be filed within 12 months of the event. More information, including the necessary forms, can be found on your county assessor’s website. 

 

Mortgage payments

In the event of major disasters, mortgage lenders may permit the forbearance of payments but keep in mind that this is typically a temporary postponement only; principal and interest will still be owed to the lender. Clients should reach out to their mortgage lender to understand their options.

 

Income taxes

Disaster victims may also get an extension on federal and state income taxes. The IRS maintains a list of tax relief provisions for taxpayers affected by disasters

 

Due to the wildfires, L.A. County residents have been given extra time to file federal tax returns and make corresponding tax payments. Details can be found at irs.gov.

 

California has announced that the state will offer similar relief for both returns and tax payments owed by L.A. County residents. Those details can be accessed at ftb.ca.gov. Clients should also consult with a tax advisor to confirm that their situation qualifies prior to relying on any extension.

 

Potential income tax deductions for losses

To be sure, clients should consult with a tax and accounting specialist. But it helps to have the following potential individual income tax deductions in mind. 

 

  • Casualty loss deduction: The U.S. government has designated the Los Angeles wildfires as a federally declared disaster. That means taxpayers may be able to write off many wildfire-related losses on federal income tax returns — potentially including damage to, or the loss of, a primary residence. Individuals also may be able to deduct personal losses related to vehicles and household items.
    In general, taxpayers claiming a loss on a return must include the federally declared disaster number on the return. For the L.A. wildfires, the Federal Emergency Management Agency’s assigned disaster declaration number is 4856-DR.

  • Itemizing deductions: To claim a casualty loss, filers must itemize these deductions using Form 1040 and Schedule A. For qualified disaster losses, which are losses due to a federally declared disaster, a deduction can usually be claimed for casualty losses without itemizing other deductions on Schedule A.

  • Documentation: It’s crucial for clients to document the fair market value of their property before and after the fire, as well as any improvements made over time. This information will be needed to calculate the deductible loss. Additional documentation may also be required, such as proof that that client was the owner of the property or contractually liable for the damage, the type of casualty and when it occurred. Be sure to save all receipts for disaster-related expenses.

  • Insurance reimbursement: If a taxpayer is attempting to deduct a loss, any insurance reimbursement received generally must be subtracted from the total loss amount. If an insurance payout exceeds the adjusted basis of the property, this might result in a casualty gain, which could be taxable.

  • Investment real estate: Losses incurred on any investment real estate properties are likely to be considered passive losses. Usually, passive losses can only offset passive income and not portfolio income — that is, income from investments such as the gains from stocks or mutual funds.

 

Statements and forms

To continue getting important physical mail that may include information needed for tax purposes, clients should consider getting a P.O. Box and having mail forwarded there. This P.O. Box could be used as a consistent and safe mailing address for all the forms needed to help get your clients on the road to recovery.

 

Aside from information and resources, empathy and listening are also crucial during times like these. Simply making a connection — a call, text or email letting clients know that you are a resource that they can turn to — may make all the difference. 

MCES

Michael Schmid is a senior wealth planner at Capital Group Private Client Services. He has 20 years of investment industry experience, 12 with Capital Group. Michael is based in Los Angeles.

ARRP

Aaron Petersen is a senior wealth research specialist covering planning topics relevant to high net worth investors. He has 22 years of investment experience and has been with Capital Group since 2000. He holds the Certified Financial Planner™ designation.

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