Tax Tips: Special situations

This is the last in the series of articles that brought you advice from an experienced CPA on how to work the tax code to your advantage to trim your bill come April 17.

Sometimes your life changes drastically, due to a death in the family, a natural disaster, or the break-up of a marriage. In addition to the personal tumult, you may have tax consequences to deal with, as well. Here's advice to help you navigate these treacherous waters.

The basics

Say you and your spouse have separated and you've decided to file separate returns for 2005. What about the joint estimated tax payments you made prior to the separation? If both of you can agree, one of you can claim all of the payments or you can divide them in any other way you wish. However, if you can't agree, you'll have to divide the payments in proportion to the amount of tax you owe on your individual returns.

Were you divorced last year? Then you're treated as unmarried for the whole year, assuming you haven't remarried before the end of the year. File as a single person unless you care for a child and qualify as a head of household.

If you were widowed last year, you're still entitled to joint filing status for 2005. If your spouse died in 2004, you can qualify for widowed status-and the same threshold as a married couple filing jointly-if you didn't remarry last year and you have a dependent child living with you.

Did you suffer an unexpected loss last year? There are special provisions in the law to help you recover.

In order for a casualty loss to be deductible, property must be damaged or destroyed as the result of a sudden, unforeseen, or unusual event. Natural disasters such as tornadoes, floods, severe storms, landslides, and fires qualify. So do losses due to vandalism during riots or civil disorders. Did you sustain damage to your car from an accident? Unreimbursed damage may be a deductible casualty loss as long as it wasn't caused by your willful conduct. You can deduct the loss in the year it occurred, regardless of when you repair or replace the property.

New laws and rules

The Katrina Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act of 2005 were passed in response to the damage caused by hurricanes Katrina, Rita, and Wilma. The laws provide tax breaks to help those affected by the storms. (For details, see IRS Publication 4492, available at http://www.irs.gov/pub/irs-pdf/p4492.pdf.)

If you meet the requirements specified in Publication 4492 and are a victim of one of those storms:

You can take advantage of tax-favored early distributions from an IRA or qualified plan. The distributions-up to a maximum of $100,000-will be taxed as income over a three-year period and the 10 percent additional tax on early distributions is waived. If you put any of the distributions back into an eligible plan within three years, it'll be treated as a qualified rollover.
Generally, there's a limit on the casualty or theft losses you can claim on personal property. But these limits have been eliminated for unreimbursed losses that resulted from these hurricanes, so the entire amount is deductible.

New laws also give special tax breaks to all taxpayers for charitable contributions paid in cash or by check between Aug. 28, 2005, and Dec. 31, 2005, whether or not the contributions are for Katrina relief. Generally, charitable deductions are limited to 50 percent of your adjusted gross income. But for contributions during that period, you can deduct up to 100 percent of AGI minus any other charitable contributions.