Flood victims may have to repay damage deductions

BY SCOTT RAYNOR | JULY 17, 2009 7:15 AM

Victims of last year’s flooding were promised tax deductions. But now, they must give that money back.

After residents examined the damage, the Iowa Department of Revenue advised taxpayers — through a change in the tax code — to deduct their losses in anticipation of a change in state law.

That change never came.

The flood victims who have received the deductions have to make a difficult decision to either comply and return the tax relief money — as they are legally obligated to do — or they can hope for the law to pass during the next legislative session.

If it passes, the legislation could be adopted retroactively. Or, taxpayers could find themselves forced to pay back the money — along with interest, said Susan Moore, a certified CPA and tax manager of RSM McGladrey.

“It is a shot in the dark,” she said. Approximately half of her clients chose to wait for the next legislative session, she said, but many will send back the deductions they received.

And even local CPAs said learning the legislation wasn’t adopted was “shocking.”

“I think it was very disconcerting to learn that three days before the end of the tax filing season that they are not going to allow these deductions,” said John Garrity, whose accounting business is based in Coralville.

The expected deductions were included in the Midwest Flood Relief, which Congress passed in October 2008 to allow victims of flood damage to deduct losses. The Iowa tax code was adjusted to include the tax deductions in anticipation of the Iowa Legislature coupling with the federal law or adopting a federal regulation on the state level.

Depending on whether the taxpayer is a business owner or home owner, Moore said, the deductions could range anywhere from $1,000 to $1 million.

However, by the end of Iowa’s judicial session in April, the federal provision was never coupled with state code because limited funds.

“It is all about the relatively precarious budget situation,” said Ed Wallace, the president of the Iowa Taxpayers Association.

Moore said timing played a big role. Because the federal law was passed so late in the year, it didn’t allow the Iowa government much time to react. And Moore said the Iowa Legislature not adopting certain federal tax codes is a regular occurrence.

The Iowa tax code didn’t adopt federal deductions for student fees such as textbooks and tuition, a move Moore and Garrity said took many by surprise.

“They knocked that one out in 2008, and no one knew about it until April 27,” he said.

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