For Federal Income Tax Returns
The IRS announced that taxpayers who live in counties designated by FEMA as disaster areas because of the January 2023 storms now have more time to file and pay their Federal Income Tax Returns.
As of the date of this writing eligible taxpayers for the Federal postponement are individuals and businesses that are located in Alameda, Colusa, Contra Costa, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Tulare, Ventura, Yolo and Yuba counties. See the IRS news release for updates to this list: HERE
Eligible taxpayers for Federal purposes have until October 16th to:
- File their 2022 income tax returns (individual, business, and tax-exempt entities)
- Pay their 2022 Q4 Estimate
- Pay their 2022 Balance Due
- Pay their 2023 Q1, Q2, and Q3 Estimates
- Make 2022 IRA contributions (be sure to check with your financial institution that they will accept payments after 4/18/23)
- Make 2022 HSA contributions (be sure to check with your financial institution that they will accept payments after 4/18/23)
Note: Four more counties were added as of 3/9/23. Those counties are: Imperial, Kern, Plumas, and Sierra. But their postponment covers only deadlines that ocurred after March 9th (so it is pretty much everything listed above except the 2022 Q4 estimate). To see the latest News Release, click HERE.
For California Income Tax Returns
See the California news release for updates to this list: HERE.
Eligible taxpayers for the California Postponement have until October 16th to:
- File their 2022 income tax returns (individual & business returns normally due on 3/15 or 4/18)
- Pay their 2022 Q4 Estimate
- Pay their 2022 Balance Due
- Pay their 2023 Q1, Q2, and Q3 Estimates
- Pay their PTET payments (normally due 6/15)
Should you wait?
There are two steps to your tax return: Filing and Paying
- Filing: Your tax preparer may have other work already planned for after April 15th (the normal deadline) so we encourage you to file earlier rather than later.
- Paying: If you are discliplined with money, it does make sense to delay making the payments. Save that cash and earn interest on your money until the payments are due on October 16th. If you are not disciplined with money then you may want to make the payments on the regular schedule.
WHO CAN GET RELIEF
If you live or work in the disaster area you are eligible for this tax relief, you do not have to be a victim of a flood or mudslide. Individuals who can receive this relief are:
- Principal residence in the disaster area
- Business principal place of business in the disaster area
- Relief worker with recognized organization in the disaster area
- Records are located in the disaster area
- Individual visiting the disaster area who was killed or injured due to the disaster
- Spouse of an affected tax payer
COUNTIES THAT QUALIFY
Here is the list of counties that qualify as disaster areas as of the publish date of this article: Alameda, Colusa, Contra Costa, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Tulare, Ventura, Yolo and Yuba.
WHAT IS THE RELIEF
The tax relief available is, any of these actions below that were due on or after January 8, 2023 are now postponed to May 15, 2023. This includes
- Filing of Income Tax and Payroll Tax returns (Form 1040, 1041, 1120, 1120S, 1065, 706, 990, 940, 941)
- Any estimated tax payments that were due in that period (this includes 2022 Q4 and 2023 Q1 estimates for calendar year taxpayers)
- IRA and HSA contributions
- Claims for refund
- Hundreds of other actions: To see the complete list of actions that are postponed, see Treas Reg 301.7508A-1(c)(1) and Rev Proc 2018-58
- Tax relief does not postpone the due date for W2s and 1099.
SHOULD I WAIT?
Keep in mind that just because the government has given you more time does not mean that your tax preparer or the brokers who accept IRA and HSA payments can handle the postponement. Many tax preparers already have other work scheduled after 4/18 and most software is coded for a 4/18 deadline so there can be administrative issues with trying to do things after the original due date. So be sure to check with the professionals who support you if you need more time to file/pay.
Good news for California residents who have received settlements from the PG&E Fire Victims Trust (FVT) or the Southern California Edison Settlement. Last night, both houses of the California legislature passed AB1249 and SB1246 and the Governor is expected to sign them.
This bill excludes the settlement money from gross income for California income tax purposes. This treatment is available to victims of the 2015 Butte Fire, the 2017 North Bay Fires, the 2018 Camp Fire, the 2017 Thomas Fire, 2018 Woolsey Fire.
Note this is for California income tax ONLY. Your settlement may still be partially or fully taxable for Federal Tax purposes. If you are not a California resident, your settlement may still be taxable to your resident state.
To get more information about the Federal Taxability of your settlement please see our earlier posts on this topic and contact a tax professional.
On June 28th, the Commissioner of the IRS responded to a request by Congressman Mike Thompson and Congressman Doug LaMalfa requesting guidance on the taxability of the settlement funds received from the Fire Victims Trust (FVT). The IRS letter echoed articles you have seen here on calfiretaxinfo.org where we’ve been providing this guidance for over a year now.
A quick summary of the IRS letter is:
- Your settlement is considered income unless you can find a specific IRC Code section to exclude it. (IRC 61) – so anyone who tells you it is not taxable because they did not receive a 1099 is wrong.
- Payments for physical injury are excludable from gross income. (IRC 104)
- Payments for emotional distress are not excludable unless the emotional distress is caused by the personal physical injury or are an actual reimbursement of medical expenses that were not previously deducted. (IRC 104)
- Payments to reimburse for necessary personal, family, living, or funeral expenses are excludable from gross income. (IRC 139)
- Payments to rebuild (not replace) your home are excludable. (IRC 139)
- Payments to replace your contents are excludable. (IRC 139)
- Payments that are not otherwise excludable may be able to be deferred as an involuntary conversion. (IRC 1033)
Of course, this is an over-simplified summary of how to treat the payments. Calculating the taxability of your settlement can be extremely complex and thus we recommend you hire a professional tax preparer to help you if you lost your home in the fire and/or are receiving payments from the Fire Victims Trust.
As we’ve discussed in earlier posts on this site, for most taxpayers, the settlements from PG&E will be partially or fully taxable. However, relief from California tax may be coming via AB1249.
What is AB1249?
- AB1249 would exclude the PG&E settlement money from gross income for California income tax purposes (Note: it would still be taxable to the Feds). This treatment would be awarded to victims of the 2015 Butte Fire, the 2017 North Bay Fires, and the 2018 Camp Fire.
What is the status of AB1249?
- The bill passed the Assembly in February 2022.
- The bill passed the Senate Finance committee on 6/1/22 and was sent to Appropriations.
- I spoke to the Senate Appropriations committee analyst in early June and he said that the bill will be a Suspense candidate so it will get final consideration when they take up their Suspense file (around 400ish bills) which will likely be on August 11th or 12th.
- So August is the soonest that this bill will be passed.
On March 30, 2022, bipartisan legislation was introduced to make the PG&E payments non-taxable at the Federal level. This bill was just introduced and has a LONG way to go to get approved. Here is the Press Release from Mike Thompson’s office (CA-05).
There is similar legislation in the California legislature that would make the payments non-taxable for California purposes. See the story HERE. The California bill has been approved by the Assembly and is awaiting a Senate vote so this bill is much further down the road than the Federal one. Word on the street is that the State Senate will vote in May 2022 on this bill.
What should you do about your taxes?
- Many practitioners are having their clients file extensions for 2021 and paying the full amounts that could be due to the Feds and the State.
- Then once the legislation gets passed, the real return will be recalculated and filed and hopefully the client will be due a refund.
As we’ve discussed in earlier posts on this site, for most taxpayers, the settlements from PG&E will be partially or fully taxable. However, relief from California tax may be coming.
AB1249 passed the assembly last week and is going to the State Senate for review. If this bill passes, it would exclude the PG&E settlement money from gross income for California income tax purposes (Note: it would still be taxable to the Feds). This treatment would be awarded to victims of the 2015 Butte Fire, the 2017 North Bay Fires, and the 2018 Camp Fire.
This bill stalled in the assembly for almost a year, so it is unclear if it will actually pass or not. But if you are going to be eligible for this exclusion, you may want to wait to file your 2021 California Income Tax Return.
We previously discussed the taxability of the PG&E settlements that many fire victims are receiving (See, Is My PG&E Settlement Taxable? from August 3, 2021). We received a few questions recently:
Q1: I received a payment of 30% of the total award that is due to come to me. How do I allocate that award?
A1: Most taxpayers have received the worksheets from the Fire Victims Trust (FVT) that shows the details of the award. So, if you receive a payment for 30% of the total award, then you should allocate it across the award categories shown in the worksheets.
In addition, the FVT has stated that preliminary payments are meant to represent a pro rata allocation of the expected approved claim.
If the settlement agreement is silent as to the allocation (Or you decided not to get the worksheets from the FVT that show the allocation) then the amount received should be allocated based on the claim for damages.
(Knuckles v. Commissioner; Threlkeld v. Commissioner).
Q2: I understand how the Feds tax the award. Does California tax it the same way?
A2: Yes, in general California conforms to the Federal treatment of gross income under IRC 61. (CA RTC 17071)
Q3: How do I handle the attorney fees paid to obtain an inverse condemnation award?
A3: Legal fees paid to litigate/obtain a condemnation award are offset against the amount of the award and thus reduces the amount realized and thus the amount that needs to be reinvested to get full gain deferral under IRC 1033. (Rev. Rul. 71-476).
E.g. Taxpayer received a condemnation award of $500,000. They paid $150,000 in attorney fees to get the condemnation award. So, $500,000 – $150,000 = $350,000 that is considered the amount realized from the condemnation. This amount will be included in the overall calculations to determine if the taxpayer has a gain on the casualty.
(Author’s note: This does not mean that all of your attorney fees are treated this way. Only a specific subset of your fees related to a condemnation award).
Q4: What if I took a loss on my 2017 tax return and now that I am receiving PG&E money, I no longer have a loss?
A4: Under the tax benefit rule, the excess is included in income in the year received to the extent of the tax benefit received in the earlier year. (Treas. Reg. 1.165-1(d)(2)(iii) and Mager v U.S.).
(Author’s note: This calculation always hurts my head and I do taxes all year long. So, it may not be something the lay person wants to tackle).
The IRS recently announced (IR-2021-224) that individuals and businesses in Lassen, Nevada, Placer, Plumas, Tehama, and Trinity counties have until January 3, 2022 to file and pay any taxes that were originally due between July 14, 2021 and January 3, 2022. This includes:
- Individuals who filed a timely extension for their personal income tax returns (note: since payments for 2020 returns were due on May 17, 2021 the payments are not eligible for this relief)
- Calendar-year businesses who filed a timely extension
- Quarterly estimated income tax payments normally due on September 15, 2021
California conforms to these deadlines (RTC§18572)
The California wildfires beginning July 14, 2021 (4610-DR-CA) and the Caldor fire (4619-DR-CA) have been named presidentially declared disasters. This declaration provides additional assistance and tax relief to taxpayers with a home or business in this area.
The IRS announced (CA-2021-03) that victims of wildfires that began July 14, 2021 in Lassen, Nevada, Placer, Tehama, Trinity, and Plumas counties now have until November 15, 2021 to file tax returns and make tax payments. This applies to any tax deadline between July 14, 2021 and Nov 15, 2021 and includes filing of income tax, payroll tax, and excise tax returns, as well as paying estimated tax payments.
The Franchise Tax Board automatically conforms to IRS postponement period for presidentially declared disasters thus has also extended deadlines for filing tax returns and making estimated tax payments to November 15, 2021.
While not officially on the list yet, El Dorado county should be added shortly since a presidential disaster was declared on September 12th.