IRS: 'Adjustments for Hurricane Grants Must Be Made by July 30th '

The Internal Revenue Service is reminding eligible homeowners who received federal reimbursement grants stemming from Hurricanes Katrina, Rita or Wilma that there is still time to take advantage of last year’s tax law change. Eligible homeowners have until July 30th to take advantage of a new law that allows homeowners to adjust previously claimed casualty loss deductions they suffered on their main home from Hurricanes Katrina, Rita or Wilma.

The Housing and Economic Recovery Act, enacted in 2008, included the new provision, aimed at helping grant recipients who previously claimed hurricane-related disaster-loss deductions. “Notice 2008-95 provides specific guidelines to homeowners who received these grants, including the Louisiana Road Home Grants and the Mississippi Development Authority Hurricane Katrina Homeowner Grants,” said IRS Spokesperson Dee Harris.

The notice explains how eligible taxpayers can amend prior-year returns to reduce the casualty loss deduction by the amount of the grant. Taxpayers have one year to pay back any resulting tax due, penalty-free and interest-free. To qualify for this relief, these amended returns must be filed by July 30, 2009, and the entire resulting tax due must be paid by July 30, 2010, in most cases.

Before this change, homeowners who claimed casualty loss deductions and received grants in a later tax year as reimbursement for the loss were required by law to pay tax on part or all of the grant to compensate for the tax benefit of the prior deduction. While individual circumstances varied, this meant that some taxpayers ended up paying more tax on the grant than they saved by claiming the deduction.

The IRS cautions that, although filing an amended return may be a good option for many, it would not necessarily be the right choice for everyone. “Affected taxpayers and their representatives should consider carefully which option is best under their particular circumstances,” advised Harris.

For more information and additional guidance, read Notice 2008-95.

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