IRS has bad news on Road Home

Posted by David Hammer, staff writer September 16, 2007 8:48PM

Now that the Road Home has paid out more than 50,000 grants, many of those recovering homeowners are encountering a new cruel reality: They may have to send up to 35 percent of the federal grant right back to Washington in the form of income taxes.

If they claimed a casualty loss for their damaged property as a deduction on their 2005 tax return, they must add the grant to their taxable income in the year it's received.

Or, worse, they may find that their decision to claim a casualty loss -- made long ago, in some cases before the federal government sent billions to Louisiana for the Road Home program -- will suddenly thrust them into a higher tax bracket, forcing them to pay higher taxes on all of their income for this year.

The Internal Revenue Service would normally treat Road Home grants as nontaxable gifts, but if the grant applicant claimed a casualty loss from the 2005 hurricanes and later gets the Road Home compensation, the IRS considers the grant a duplication of the 2005 tax break, and it becomes taxable income in the year it's received.



Wayne Taylor of Slidell said he did a double-take when he read in the newspaper that his Road Home grant would be counted as taxable income in 2007 if he claimed the loss in 2005. He had claimed a loss totaling as much as his grant. He called his brother, an accounting clerk in Tulsa, Okla., who immediately started warning the dozens of elderly displaced Road Home applicants he knows in his community. None of them was ready for the shock.

"I'm lucky," said Taylor, a retired technician who supplements his pensions with a $40,000-a-year job. "I have people to advise me, and I'm still working, so I can absorb the hit. But a lot of people don't even know they have a liability."

Delivering bad news

New Orleans accountant Jerry Schreiber has spent much of the past year delivering the bad news about the taxability of Road Home grants to angry clients and colleagues.

For example, he said if Social Security recipients claim sizable casualty losses and then get large Road Home grants, they could go from not having to file a federal tax return to having to pay taxes on all their income: their pension and their grant. "When you lose your world and your comfort zone, it's very difficult," Schreiber said. "This is the emotional toll of all of this. And it's why it's so, so difficult to get people to pay attention to the tax issue. It comes in now, along with everything else: the insurance companies, the LRA, whether the levees are rebuilt. It's too much for a lot of people."

As few taxpayers understand the intricacies of the tax code, even fewer thought to consider the potential Road Home taxation issue back when they decided whether to claim a casualty loss on their 2005 return -- or, through a special provision, their 2004 return. The IRS decided only late last year that the grants would be taxable. That left local accountants giving clients nebulous advice, even as they met with them this year to prepare 2006 or 2005 returns, which could be filed all the way up to April 24.

U.S. Rep. Bobby Jindal, R-Kenner, and Sen. Mary Landrieu, D-La., each submitted legislation to exempt the grants from taxes, but the chances of passage aren't good.

"There are definitely very panicked people calling here about it, so she'll do everything in her power to get it done. But it's a challenging thing to get done," said Landrieu spokeswoman Stephanie Allen.

Not much optimism

As he prepared to push other priorities to Congress, Andy Kopplin, the executive director of the Louisiana Recovery Authority, the state agency that created the Road Home, was even less optimistic about the tax-break bill's chances in Washington.

"We're going to be pragmatic and work with our delegation to pass the bills we can pass," Kopplin said. "There hasn't been as positive a reception to that piece of legislation,"

Landrieu's staff said it has met with congressional budget staff to find out how much it would cost in lost tax revenue. IRS spokeswoman Deirdre Harris said it's hard to get a good count of how many Louisiana taxpayers claimed casualty losses from the hurricanes because they can still do so up until April 24, 2010, and Schreiber expects many of them to wait until the last possible moment to decide.

Geralyn Suhor, an accountant from St. Bernard Parish who prepares tax returns for homeowners in that hurricane-ravaged community, said ever-changing rules in the Road Home program and the IRS uncertainties made complex accounting work even more difficult.

She didn't know all the tax implications for Road Home grants while she was working with clients on 2005 and 2006 returns, but she made sure to warn them anyway.

"Now, I get calls from people who've just gotten their Road Home money, and they want to know what the tax implications are," Suhor said. "If I claimed a loss for them in 2005, I say you ought to think about putting some of the money away for taxes before using it for rebuilding. ... They've been waiting on this money to rebuild, and now this."

Nervous accountants

Suhor advised clients who claimed casualty losses on their 2005 returns to make estimated future tax payments. She also advised some to elect to take the Road Home payments in installments to spread out the income over two tax years, if possible.

The tax issue was so uncertain for much of last year that the IRS turned to a group of New Orleans-area accountants to come up with special breaks for Katrina victims.

Suhor said the problem is exacerbated because, in many cases, hurricane victims are making significantly more money in 2007 than they did in 2005, when Katrina's wrath cut off employment income for some taxpayers for the final third of the year. That's another reason a sudden uptick in income this year could push so many into higher tax brackets.

"It's very difficult for us to know what is impacting people, so working with local practitioners helps us give better guidance," said Harris, who recommended that taxpayers check www.irs.gov and search under "Help for Hurricane Victims."

Schreiber was the federal government's key local contact. He said tax professionals -- the ones who must decipher how Katrina's damage is handled in the infamously esoteric tax code -- are more nervous than ever. They want to produce solid tax returns for clients who lost everything, but they also depend on those traumatized clients to provide detailed records of their losses, he says.

He said the IRS still has yet to give guidance on the various tax implications of the three Road Home options of rebuilding, selling to the state and buying a new home in Louisiana, or selling to the state without buying again in Louisiana.

Meanwhile, the state has decided not to distribute Form 1099 to Road Home recipients, leaving the door open to the possibility that the IRS may never find out about the grant income. Schreiber said he and other CPAs are worried about taxpayers using that as an invitation to avoid reporting the Road Home money, which he said would be a big mistake.

"Of course, you'll have to be careful to explain to the client the tax consequence, but people will still want to roll the dice," he said. "Cheating on taxes is a game, but I hope they know if they get caught, the penalties and interest will eat them alive."

David Hammer can be reached at dhammer@timespicayune.com or (504) 826-3322.

Originally published here on September 18, 007.

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