WASHINGTON — Louisianans hit by the floods of 2016 should consider digging up last year's federal tax filings following the GOP-backed tax overhaul passed by Congress on Wednesday.
Twin tweaks to the tax code will allow many of those who lost property in the March and August floods to write off far more of their losses on their federal tax returns — and avoid penalties for those who tapped retirement accounts early to rebuild.
The Congressional Budget Office estimates those changes would save Louisianans a total of roughly $500 million in federal taxes.
Folks who want to claim the new tax benefit will need to file amended 2016 tax returns, according to several congressional staffers and Louisiana tax experts.
Anyone with more than $500 in losses from the 2016 floods that weren't covered by insurance or government grants will now be able to deduct those costs from their taxable income — even if they didn't itemize deductions on their taxes and claimed the standard federal deduction instead.
That's a major change from current tax law, which imposed steep limits on claiming "casualty losses" and excluded those claiming the standard deduction from taking that benefit, said Brandon Lagarde, tax director at Postlethwaite & Netterville in Baton Rouge.
That meant lower- and middle-income Louisianans hit by the floods likely didn't benefit from the tax break — but likely will under the new disaster-relief provisions.
IRS rules generally require casualty losses to exceed 10 percent of a person's taxable income before they can be written off, Lagarde said, and only those losses above that threshold can be deducted. For a family making $100,000 a year with uncompensated flood losses of $15,000, only $5,000 could've been deducted on their federal tax return.
Now, all taxpayers hit by the floods can deduct any uncovered losses over $500, Lagarde said.
The new tax bill also waives an IRS penalty for flood victims who pulled cash out of their retirement accounts early — and allows them to spread out federal income taxes on those withdrawals over three years instead of taking the hit all at once.
Normally, anyone tapping retirement accounts before the minimum age requirement is charged an extra 10 percent fee.
But under the new bill, those who lost property in the floods and live in one of the parishes covered by 2016 federal disaster declarations won't have to pay the fee. And the withdrawals can now be spread over several years, effectively delaying federal taxes and keeping some taxpayers in lower brackets.
Flood victims who pulled $30,000 from their 401(k) account, for example, are now able to get back the $3,000 penalty paid on the withdrawal — and can claim $10,000 in taxable income on their 2016, 2017 and 2018 federal tax returns instead of claiming all $30,000 in 2016.
Anyone who decided against cashing in part of their retirement account because of the 10 percent penalty still has time to take advantage of the new rules. The bill waives the penalty for all withdrawals by flood victims made before New Year's Day.
Flood victims looking to overhaul their 2016 tax returns will need to file an IRS form 1040X — used to amend past-year filings — and have up to three years from the date they filed their original 2016 return to do so.
The IRS will cut a check for the difference between what you initially paid in 2016 federal taxes and what you now owe under the revised rules.
Similar tax breaks have been extended to victims of previous disasters, including Hurricane Katrina, but those also required congressional authorization.
Louisiana's delegation has battled for the tax breaks for victims of the March and August floods for more than a year. Previous efforts to secure the tax relief, however, went nowhere on Capitol Hill.
Congress gave victims of hurricanes Harvey, Irma and Maria identical tax breaks earlier this fall — but left out Louisianans still recovering from the devastating floods, a move that left many in the state's delegation furious.
The provisions weren't in the U.S. House of Representatives' draft version of the bill. But Sen. Bill Cassidy, R-Louisiana, managed to work the disaster tax provisions into Senate Republicans' version of the "Tax Cuts and Jobs Act" during committee hearings in November.
Cassidy and his colleagues, led by U.S. Rep. Steve Scalise, R-Jefferson, then lobbied furiously to keep the tax breaks in the final compromise version of the bill.
Several top Capitol Hill Republicans balked at the relief package because of the price tag of roughly $5 billion over the next decade. Scalise, as the House's No. 3 Republican, wields considerable influence in the Capitol.
Though only about $500 million of that will go to 2016 Louisiana flood victims, rules for the Senate procedure Republicans used to pass the tax bill on a simple-majority vote required the provision to cover victims of other disasters as well, increasing the cost.
Procedural rules also imposed a hard cap of $1.5 trillion on the overall cost of the tax overhaul, meaning GOP negotiators had to balance the cost of each tax measure against other priorities.
Cassidy said his seat on the Senate's Finance Committee, which oversaw the tax rewrite, helped ensure that tax relief stayed in the final bill.
"It was in play until the very end," Cassidy said. "It almost dropped out and we were able to preserve it."
Editor's note: An earlier version of this story incorrectly spelled Brandon Lagarde's last name.