Should I Stay or Should I Go? A guide to deciding when to file form 4684 (Part 2 of 2)

In our last post we discussed the difference between Federal Disasters and Qualified Federal Disasters. We told you that a Qualified Disaster get a better tax treatment than a regular Federal Disaster. And we told you that we’d help you decide if you should wait for your disaster to be Qualified.

But there’s something we didn’t tell you.

There are no more Qualified Disasters. At least there have not been any since 2021.

How Come?

You might reasonably think that one reason for no Qualified Disasters is that things have gotten better, that there are not as many or as severe disasters. Unfortunately, that’s not the case as this chart from climate.gov shows:

In recent years, the United States has seen a significant uptick in the frequency and intensity of “billion-dollar disasters”, defined as events with losses exceeding 1 billion dollars. From 1980 to 2024, the nation experienced 383 events. The annual average of such events from 1980 to 2023 was 8.5, but this number has risen sharply in the last five years, averaging 20.4 events per year.

This increase is attributed to a combination of factors, including more assets at risk, greater vulnerability to damage from natural hazards, and the exacerbating effects of climate change on extreme weather events. The economic and human toll of these disasters is staggering, with total costs exceeding 2.7 trillion dollars and the loss of over 16 thousand lives.

So, if disasters haven’t gotten kinder and gentler, why haven’t there been any “qualified” events since 2021?

You know that they say… Follow The Money…

The Casualty Loss Program is one of those Federal benefits that can easily be cut without a lot of fanfare or scrutiny, but its savings can be significant. You’re cutting government spending by not being so generous to disaster victims, but if there’s no current disaster, maybe no one will notice.

The legalities get pretty involved, but here’s a simplified timeline:

Prior to 2009 you could use the Casualty Loss Program without a disaster. In 2009, the law was changed to require that your losses must exceed 10% of your Adjusted Gross Income(1). In December of 2017, the Tax Cut and Jobs Act (TVJA)  further narrowed the use of the Casualty Loss Program to “Federal Disasters” declared under the Stafford Act.  The Disaster Tax Relief and Airport Extension Act of 2017 and Taxpayer Certainty and Disaster Tax Relief Act of 2020 created the concept of a “Qualified” disaster where you could file if your losses were more than $500 (no 10% AGI requirement)  and you didn’t need to itemize and grandfathered in the events you see in the instructions.

So why have there been no Qualified Disasters since 2021?

Let’s start with the Form 4684 instructions:

Note those dates – 2017 through 2021. If a Disaster happened within those dates, the President could declare them as “Qualified”. After that date, the President is powerless to declare a “Qualified” Disaster.

Publication 547 gives you the full list on page 4. In summary, the Qualified Disasters are: A major disaster declared by the President under section 401 of the Stafford Act in 2016,  Hurricane Harvey,  Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, The California wildfires in 2017 and January 2018 and a major disaster that was declared by the President during the period between January 1, 2020, and February 25, 2021.

What about Disasters since 2021?

Remember when your Mom or Dad would say to you “That would take an Act of Congress!” and they would then roll their eyes indicating it would never happen. That’s what it takes to get a Disaster “Qualified”. An Act of Congress. The Qualified Disasters of 2018 and 2019 were “grandfathered in” under the new legislation, but in the intervening years, Congress has never Qualified another Disaster. That’s despite the ravages of the Paradise fire, the Marshall Fire, Hurricane Ian’s path of destruction and the horrific Laina Fires, not to mention any number of tornado strikes and other storms.

The laws governing all this are currently running out in 2025, so either Congress needs to extend them, or put in a new treatment by then. Otherwise, things go back to where they were in 2016. This seems like a highly unlikely outcome in an election year.

But What If?

We understand. Hope springs eternal. Perhaps the disaster you’re involved in is big enough and mean enough that maybe it will get the coveted “Qualified” status. You may have even seen in the news that there are several bills in Congress to try to Qualify some more recent disasters like Hurricane Ian.

If you were impacted by the hurricane, your CPA might even had told you to wait to file.

In this case you could make a lot more by waiting --- right?

Well… Not so fast.

If you want to wait for Qualification, the longest you hold out is three years from the tax date of the year the disaster occurred (or the year after if it occurred after the April tax filing deadline). After that your ability amend your taxes goes away. In fact, if your event would have created a carryforward loss (an “NOL” (2)) not only will you need to amend your taxes for the disaster year, but you will also need to amend them for the following several years.

Our Free Tax Savings Estimator also has a handy “What If” button. There are 4 possible strategies:

1.      File and forget 

In this case you’ll just file the first year and never check back to see if the event is qualified. You’d be amazed, this approach sometimes works out the best.

2.      File and amend after Qualification   

In this case, you file the year of the disaster and, later on, the Disaster becomes qualified, so you will amend a couple years’ worth of taxes.

3.      Wait to File until after Qualification 

In this case, you do nothing now, you wait for qualification. Eventually, it is qualified, but now you need to go back and refile a couple years’ worth of taxes.

4.      Wait, but the event is never Qualified

In this case, you wait, but three years pass and now you need to go back and refile for those years just to get what you could have gotten in the first place, but now you’re paying extra to re-file the tax. This is generally the “worst case scenario.”

We assume it will cost you about $500 per year to file. Selecting the “What If” button shows something like the following:

Below the table, it tells you which is your best and worst cases. In this case, it’s much better to just file and forget. Even If the event is qualified, you only get a couple hundred dollars more and that’s easily eaten up in re-filing costs!

Here’s another factor that comes into play: Filing immediately gets money in your hands now.  As any financial advisor will tell you, money today is worth more than money at some point in the future.

That’s what the “interest” row in our table is all about. You can view it as putting the money to work in an investment or avoiding the cost of borrowing money to rebuild. Either way, Einstein was right…Time is money!

The longer you wait to get your money, the worse off you’ll be.

What about all the legislation I’ve been hearing about?

We’ve been following the legislation too! Check out: https://www.wsj.com/politics/policy/senate-is-set-to-kill-bipartisan-tax-bill-c309d47b

This bill, sponsored by Rep. Greg Steube (R-Fla.)  sailed through the House and then was killed in the Senate. It would have provided qualification for Hurricane Ian.

Other bills include a proposal from Sen. Rick Scott (R-Fla.) and Rep. Kat Cammack (R-Fla.), introduced earlier this month, to provide aid and tax relief for Floridians impacted by Hurricane Idalia. It’s not expected to pass.

The FICPA also has implemented an online letter-writing campaign to petition Congress to designate Hurricane Ian as a qualified disaster, so feel free to lend your voice.

We hope that one of these bills eventually makes it through Congress, but in an election year, our advice is to not hold your breath too long.

Our illustrator generally shows that you’re better off filing sooner, rather than waiting.

If you or someone you know has been affected by a Federal Disaster, we can help with a low-cost, IRS-accepted appraisal for use with Form 4684. Please contact us if we can help.

Guess What? There's actually a Part 3 - Meet Tom and Bob. We show how they bother fared under Hurricane Ian an why Tom is looking for a new CPA. Check out Part 3 of 2.

(1)      Adjusted Gross Income, or AGI is your regular income less all your deductions except for those generated by form 4684

(2)      Losses carried forward into future years are referred to a Net Operating Loss, or NOL