Natural Disaster Tax Implications: Tax Lawyer Explains Your Options

Hello everyone, my name is Mark J. Kohler, a CPA attorney and addressing a very, very serious topic. So many people have been calling and asking what are the tax ramifications of a victim of this LA fire? They've lost everything. Their homes burned down. What does it mean with the IRS tax filing? And how much can they deduct on their tax return, if anything? Well, I'm going to break all that down and more field any questions here on this live broadcast here on YouTube and we're going to get to it right away. And first, my heart goes out on our prayers. And so many people around the the world, let alone the country I know have felt your pain in some measure. No one can imagine what someone goes through when they lose everything, let alone the house, but pets and keepsakes and just sacred, very special property. So our hearts go out to you. We hope that you can recover emotionally and financially as quickly as possible. Now, to that end, we have to talk about tax filing. We're coming up on the tax season right now. Tax returns are due for last year. Tax payments, tax payments for this Q1, Q2, Q3, what does all that mean? And then again, step two, I want to talk about what could you deduct on your tax return based on your loss? So let's just talk about what the IRS just came out this week with in regards to deadlines, a very, very important announcement. So we're going to jump over to the whiteboard here and I want to try to highlight this in a very organized fashion. So first let's talk about individuals. If you're an individual living in LA county, this only applies to LA County. Now, if you tax professionals out there around the country, you may have a client and LA county, you need to know these rules. You may have a friend or a family member that's been affected in LA county and this is the last thing they're thinking about are taxes. Maybe you can remember this, note it and share it with them. And of course, as a tax advisor, you're going to have to be all over this. So first, individuals in LA county, that's your residence, you have until October 15th to file. And here's the big one. I was kind of shocked about this with the IRS. And pay any taxes due for 2024. Now, if you've already prepaid and filed your 2024 deposits, if you will, and you normally get a refund, God bless you. The IRS is using your money wisely. But if you're still going to owe for 2024, there's no penalty. If you don't pay by April 15 and you don't even have to file an extension, you're done, you're clean. If you're in Los Angeles county, you have until October 15th to file your 1040 tax return. Let's put that in here. Your 1040 tax return until October 15th and that's to file and pay. Which is not typical. You could file an extension, but you still had to pay. Not anymore. In LA county you don't even have to pay until October 15th. Now if you're an S Corp or a partnership, normally you'd be filing by 3:15, March 15 or April 15. Nope, you have until October 15 to file. Now what's interesting here again, no extension required if your business is based in LA county, but there's no payment due. See, with LLCs and S corporations there's no payment due to. Now I'm not reporting what the California Franchise Tax Board is offering in regards to the gross receipts tax and S Corp filings. We'll do another episode on that when we get more information from the California Franchise Tax Board. But this is the IRS rule. As an s Corp or 1065 partnership, you have until October 15th to file. So you're good to go there. Now this is an interesting one. If you have employees or you're an S corporation with your own little S Corp, many realtors, landscapers, restaurant owners, all of you in LA county, you have until you do not have to file your fourth quarter 24 or Q1 or Q2 2025, you have until October 15th as well to file the reports. But let me caution you, this is not to pay. You have to pay. There is no delay in this. When you're an employer, you're withholding from people's paychecks, you got to make those deposits. But the IRS has said you can file the report that goes with that late. We don't care. You have out till October 15 with no penalty. But we want our frickin money and I suspect many of the payroll companies out there and those of you that are at the S Corp owners, if you're paying your deposit for your payroll, you might as well just do the freaking report. But you do have until October 15th to file a report, but not a delay in making your deposits. But however, when we talk about individual estimated tax payments for you, those of you that are business owners and that's who we're helping constantly, and for those of you that are advisors in our community, the Main Street Tax Pro Advisory, we want to let our clients know if in your in LA county, there is no penalty if you do not make your estimated tax payments until October 15th. And this includes Q1, Q2, Q3, and these would normally be done by April 15th, July 15th or October 15th. This is when you'd normally make those deposits. You have until October 15th. Now for the first three quarters of 2025, and even your fourth quarter that is due by January 15th, you can wait to make that deposit until October 15th. So estimated tax payments were cool. Payroll, payroll money sacred. But this is your estimated tax payments for your 1040 that you would normally send in your 1040 tax return. Now let's get into IRAs and HSAs. This is a good one. I love IRAs and HSAs. Our normal deadline, many of you know, is April 15th. To put money into your IRAs or HSAs, you now have until guess. Drumroll please. October 15th. So you can make a deposit for 2024 up until October 15th for your IRA or HSA. So this is a big deal. Seven thousand or eight thousand depending on your age. And on the HSA's four thousand one hundred and fifty or eight thousand three hundred if you're head of household or family. These are great tax deductions right on the front page of your tax return. And for those doing the backdoor Roth ira, your income level does not matter. Make sure you're looking at other videos of mine. If you make too much money to have a Roth, that's a lie. It's wrong. You can go through the backdoor method. So you have until October 15th to make those deposits for 2024. Pretty amazing. Now here's the big deal. Let's talk about the loss. So again, heaven forbid this would ever happen to any of us in our lifetime. And now they say over 10,000 structures in Los Angeles county have been destroyed. What does this look like on a tax return? Now you may think, let's look. What we would think would be the normal rule is that if my house burns down and the insurance only covers part of it, I get to deduct the rest as a loss. Not since 2020, the law has changed. In order to deduct anything on the loss of your home, it must be a federal declared disaster area. Now, Los Angeles county has now got that status. The Biden administration came out immediately and said it is now a federal declared disaster area, L.A. county. Now, with that said, any of you across the country, and there's been several this year, there's been disasters all year long in 2024, anybody that lives in a federally declared disaster area and you had a loss, you get to take a write off on your tax return. But if me in Phoenix, Arizona, heaven forbid, my house burns down and I have a loss, you do not get to deduct that. It's called a personal, personal casualty loss, no write off. So we've got to keep that in mind. So if you have a client in LA county, or your family member, a friend, or it's you and your house is burned down, here's what it may look like. I understand that the average home in a lot of these areas, we're talking Malibu, Palisades, LA County, Hollywood Hills, these are nice homes. The average fair market value is 3.8 million for the home burned to the ground. So you would think, oh, well, I have a $3.8 million loss, I get to take that as a tax write off. You'd say, why? Well, the insurance company is going to come and give you something. Now, for any of you out there that didn't have any fire insurance at all, and there's a lot of them, if you have no fire insurance at all, we're still not there. But if you have insurance, we have to offset the loss by any insurance you receive. So in this example, I just used the $800,000 insurance payout. Now, there's a lot of websites out there with estimates of what under the FAIR act and all these other insurance policies, the insurance companies have been leaving California in droves. So we don't know what the average insurance payout is going to be. We know it's going to be zero in some cases. And other people may get a full insurance payout on the value of their home. So very, very different experiences for people. But whatever your loss is, we subtract it by the insurance payout. So in this example, you'd have a $3 million loss. So that's what you get to deduct. No, not yet. It's reduced. It's your loss or adjusted basis, whichever is less. So you have to look at your adjusted basis. Well, Mark, my house was worth 3.8 million. Sorry, you only get to deduct what you put into the house. So let's look at the rest of the example. Let's say that fair market value is 3.8, but you purchased it for 1.2 million and then you put $400,000 into it. So your basis would be 1.6 million. Yeah, but Mark, I took out a second mortgage and I have a five, I have a first mortgage. For 1.2 and then a second mortgage for 600 grand. Mortgages don't matter. Don't matter. What did you buy it for and how much did you improve it? And I know your records may have been destroyed in the fire, so you're going to have to use third party records as best as possible to prove how much you put into this. New landscaping, new roof, new water heater, who knows what. Full remodel. The point is, whatever you put into the house, plus purchase price, that's your adjusted basis. Okay, so Mark, I don't get to deduct my $3 million? I only get to deduct what I put into it. Yeah, reduced by your insurance payout. So now I've got to take out my insurance payout. Okay, so now I'm down to $600,000. And that's what I get to deduct because it was an adjusted basis minus my insurance payout. I'm so sorry. One more calculation. It is Limited by 10% of your adjusted gross income because this is an itemized deduction on schedule A. So if my itemize, if I, if I itemize, it's going to be the calculation that, that helps feed that number. And so I have to start with my adjusted gross income. So what's the average income of someone living in this area? I don't know, maybe six or seven hundred thousand dollars a year. I mean, this is an expensive area. We're talking Malibu again, Palisades, Hollywood Hills. But what's the average someone may be living there that makes 100 grand a year living on Social Security, and they live in their mom's house that they inherited. I get it. But let's say the average income is 600 grand a year. Okay, so that's your AGI. So we would take that AGI times 10% and that has to come off the top. So that would be $60,000. So we reduce further the loss because you can only deduct the loss over and above 10% of your AGI. So that would be 60 grand. And so now your deduction in this example would be $540,000. Now that's the general rule. There is another path you might be able to take, and that is your, your loss is not your adjusted basis. It's the actual cost to repair, like so. But it cannot be. My house burned down. It's worth 3.8. Holy crap. This is my chance. I'm going to remodel and rebuild and it's going to be worth 4.5 when I'm done. No, it's got, it's whatever you put into the, the repair to restore it, it cannot, you can't take a write off greater than the fair market value before the disaster. So if in this example you say, well I'm going to rebuild and it's going to cost me 2 million to rebuild and I still got insurance of 800, okay, now your deduction could be 1.2 million because that's your cost to rebuild and it did not exceed your current fair market value before the disaster minus any insurance. And then again we have to minus that little AGI calculation. So that's another method that can be used. Bottom line, everybody, and I'm so, I know it's miserable hearing this for some of you. It's just there's reasons behind all this tax legislation that makes the world go around. I know it's not what you want to hear right now, but if you're affected by this in a federal declared disaster area down in Florida during the hurricane in 2024, if you're anywhere in the country with a federal declared disaster area and you had a loss, you're going to start learning this math real quick. Meet with your tax advisor, talk to them about what your options are in the way you go after this write off and how you rebuild if you do it all. I had a client I just talked to a couple months ago that the hurricane in Florida literally wiped out their rental property. They had a short term rental Airbnb on the coast of Florida, no flood insurance gone. And so they're going to have a major loss and it's just devastating. But meet with your tax advisor now. If you're a tax advisor, if you're an accountant, a CPA enrolled agent and you're like Mark, this is so hard to keep up on and continue in education and googling and I'm on LexisNexis and CCH and whatever. Think about joining a community of like minded tax advisors at our Main Street Tax Pro Group, our tax certification program. We have now trained over a thousand accountants around the country just in two years and we work together. It's CE approved education with cutting edge strategies. We're meeting weekly, we're doing trainings. Please go check it out@marcjkoler.com now this is not an infomercial but I want you tax advisors to know you can get cutting edge information for situations like this and work with the community to help victims all over the country, not just in LA county. So I hope this information has been helpful. Sometimes it's painful to hear it. Just don't hate the player, just hate the game. You know, I'm just. I'm just the messenger. And I'm trying to make sure that all of you here are able to better live your American dream, rebound, rebuild and find success in life doing what you love, fulfilling your passion, having the right structure and the right tax planning structure. If you don't have a voice you're listening to in the tax and legal arena, please continue to subscribe here on my YouTube channel or on the platform you're listening to this or viewing this and check out our podcast. I'm everywhere and I want to be there for you. Thanks so much and God bless.