We wanted to share additional information that would be useful to our clients who have been affected by Hurricane Sandy:
The IRS on Friday announced that it will allow taxpayers who have been adversely affected by Hurricane Sandy to take hardship distributions or loans from their retirement plans (Announcement 2012-44). To qualify under the announcement, hardship distributions made on account of a hardship resulting from Hurricane Sandy must be made on or after Oct. 26, 2012, and no later than Feb. 1, 2013.

Under the relief provisions announced, a qualified employer plan will not be treated as failing to satisfy any requirement under the Code or regulations merely because the plan makes a loan or a hardship distribution for a need arising from Hurricane Sandy to an employee or former employee whose principal residence on Oct. 26, 2012, was located in one of the counties or Tribal Nations that have been identified as covered disaster areas because of the devastation caused by Hurricane Sandy. The relief also applies to employees whose place of employment was in one of these counties or Tribal Nations on that date or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties or Tribal Nations on that date.

The IRS says plan administrators may rely on representations from the employee or former employee as to the need for and amount of a hardship distribution (unless the plan administrator has actual knowledge to the contrary), and the distribution will be treated as a hardship distribution for all purposes under the Code and regulations.

The relief applies to any Sec. 401(a), 403(a), or 403(b) plan that could, if it contained enabling language, make hardship distributions. It also applies to any Sec. 457(b) plan maintained by an eligible employer, and any hardship arising from Hurricane Sandy will be treated as an “unforeseeable emergency” for purposes of distributions from such plans.

The amount available for hardship distribution is limited to the maximum amount that would be permitted to be available for a hardship distribution from the plan under the Code and regulations. However, the relief provided by the announcement applies to any hardship of the employee, not just the types enumerated in the regulations, and no post-distribution contribution restrictions are required.

To make a loan or hardship distribution, a qualified employer plan that does not provide for them must be amended to provide for loans or hardship distributions no later than the end of the first plan year beginning after Dec. 31, 2012.

Under the announcement, a retirement plan will not be treated as failing to follow procedural requirements for plan loans (in the case of retirement plans other than IRAs) or distributions (in the case of all retirement plans, including IRAs) imposed by the terms of the plan merely because those requirements are disregarded for any period beginning on or after Oct. 26, 2012, and continuing through Feb. 1, 2013, with respect to distributions to individuals described above, provided the plan administrator (or financial institution in the case of distributions from IRAs) makes a good-faith diligent effort under the circumstances to comply with those requirements. However, as soon as practicable, the plan administrator (or financial institution in the case of IRAs) must make a reasonable attempt to assemble any forgone documentation.

Alistair M. Nevius, J.D.

November 16, 2012


As most of us in the tri state area returning to “normalcy” two weeks after Hurricane Sandy wreaked havoc throughout the east coast, many of you may now be contemplating the personal financial impact of the storm.  The information below from MoneyMattersNJ.com should help to answer some of your basic questions.  We of course encourage you to call or e-mail the office to discuss your specific situation in greater depth.

Rules for Casualty Losses
Losses for your personal-use property (such as your personal residence, household appliances, furniture and cars), are potentially deductible because the storm was a natural disaster. This deduction is limited to taxpayers who itemize their deductions.

If you have filed a claim for reimbursement (from insurance or otherwise) for which there is a reasonable prospect of recovery, no portion of the loss is deductible until the claim is resolved.

Generally, the amount of your casualty loss is determined by the decrease in fair market value (FMV) of the property as a result of the casualty, limited to the taxpayer’s adjusted basis in the property.

Two limitations apply to casualty loss deductions for personal-use property. First, a casualty loss deduction is allowable only for the amount of the loss that exceeds $100 per casualty. Second, the net amount of all of a taxpayer’s casualty losses (in excess of casualty gains, if any) is allowable only for the amount of the losses that exceed 10% of your adjusted gross income (AGI) for the year.

When to Take the Deduction
Since these casualty losses resulted from a federally declared disaster, you can claim the loss this year or in 2011 (the year before the loss was incurred). We will evaluate this option for you, as taking the loss via the filing of an amended 2011 income tax return may increase your tax savings and/or you may get your refund earlier than waiting to file your 2012 income tax return next year.

Information needed to claim the loss

  • Description of the property (or properties)
  • Their cost basis
  • The FMV before and after the casualty

For instance, let’s review your potential tax loss if your personal vehicle that you purchased for $30,000 was destroyed in the storm which had a fair market value of $10,000 after three years of use. If your insurance company reimburses you $4,000, then your casualty loss would be $6,000. This $6,000 loss would be grouped with all your other storm losses subject to the $100 limit and 10% of your AGI.

Not every casualty results in a loss for tax purposes, and in some cases, you may have a “casualty gain.” For instance, suppose you purchased your home for $100,000 (your tax basis) and it has increased in value to $300,000. If your home is destroyed and you receive close to $300,000 in insurance, you will have a gain of close to $200,000. In certain cases, tax on a casualty gain can be avoided or deferred if the insurance proceeds are reinvested in replacement property.

Business Losses
Casualty losses on business property are basically computed in the same manner as personal property, except that the $100 deduction and 10% limit of AGI does not apply. Please feel free to contact us for further information.

>>Click here for more Hurricane Sandy tax relief information including postponed tax deadlines for individuals and businesses in New Jersey or New York, Disaster Unemployment Assistance to New Jersey residents, Disaster Treatment of Payments to Sandy Victims and Managing the Tax and Insurance Aftermath of Sandy.