How to figure tax deductions after a casualty loss
Figuring your taxes after a hurricane, fire or other disaster can be difficult. The Internal Revenue Service can help.
Q. Our vacation home in Texas was seriously damaged by Hurricane Ike in September. Our insurance company is going to pay for most of the repairs, but our policy has a $5,000 windstorm deductible. Can some or all of the $5,000 be deducted on our next tax return?
A. It mostly depends on your income and the way you file your taxes.
Unreimbursed losses are deductible, but only if you file an itemized return. If you instead take the standard deduction, you won't get to write off any of the $5,000.
But even if you do itemize, you won't get to write off the full $5,000. Under the tax code, you first must subtract $100 from your unreimbursed losses and then reduce the remaining amount by another 10 percent of your adjusted gross income.
To illustrate, say that your adjusted gross income is $35,000. You would be able to deduct only unreimbursed losses that exceed $3,500 of your AGI. So, your $5,000 insurance loss would yield a tax deduction of $1,400 ($5,000 minus $100 equals $4,900, then subtract $3,500 for a total of $1,400).
Clear as mud, huh?
You can get more information by ordering IRS Publication 547, Casualties, Disasters and Thefts, by calling the agency's toll-free hotline at (800) 829-1040 or by downloading it from www.irs.gov. Consult a tax expert for more details.
Q. My son purchased a house in 2005, but he fell into foreclosure earlier this year after he lost his job and could no longer make his monthly mortgage payments. I did not cosign for his loan, but he named me as a "reference" on his application when he applied for his mortgage. His bank and a bill-collection agency are now sending me threatening letters and calling me, saying that they will foreclose on my own house or garnish my wages if I do not settle my son's outstanding debt. Am I legally responsible for repaying my son's loan? If not, how can I stop these harassing letters and calls?
A. You did not cosign for your son's mortgage, so you are not liable for paying the money back. The bank can't foreclose on your house or garnish your wages, regardless of what the lender or bill collector tells you.
You need to sit down and write two letters - one to your son's bank, and the other to the collector who's hounding you. The letters should state that you are not responsible for the payments because you did not cosign for the loan, insist that the companies stop contacting you and point out that it will be a violation of the federal Fair Debt Collection Practices Act if they don't halt the threatening letters and calls.
Make sure you send the letters by certified mail, return receipt requested, so you will have proof that both parties have been notified of your non-responsibility for the mortgage. If the calls and letters don't stop soon, register a complaint with the Federal Trade Commission by calling its toll-free hotline, (877) 382-4357, or filing online at ftccomplaintassistant.gov.
Another option is to sue. Under the FDCPA, you can sue for up to $1,000 in damages - plus "reasonable" attorney fees - if you can prove that a debt collector has violated the federal law by continuing to harass you after it has been informed that its letters and calls must stop. But filing such a lawsuit might not be a good choice, especially if you don't want to spend lots of hours in court and pay a lawyer for a case whose outcome is uncertain.
Q. We own our home, but we also own a house in another state that we inherited from our late uncle. If we create the type of basic living trust that you recently wrote about, would we have to form one trust for the home we own here and a second trust for our out-of-state property?
A. No, only one trust would be needed. Forming a trust and putting both your personal residence and the out-of-state house that you inherited into it probably would be a good financial and estate-planning move.
Millions of people around the United States have purchased or inherited a home, land or other property in a different state. When they die, their estate usually must go through two probate proceedings - one in the state where they lived, and a second in the state where their other property is located. The twin proceedings are costly and time-consuming for heirs.
People who wisely create a basic living trust, however, can spare their heirs from the probate process altogether. That's because a trust is considered a private document, and therefore is not subject to a probate court's review. By creating an inexpensive trust and putting both houses into it now, you will save your designated heirs the hassle of going through probate later and help to ensure that they inherit the property quickly, without paying lots of money for attorney's fees and court costs.
• For a copy of the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.