Hurricane Harvey: Advice on tax planning, rebuilding costs
Seeing pictures of the horrific floods in Houston after Hurricane Harvey, I’m reminded of what television personality Mr. Rogers often said, “Look for the helpers. You will always find people who are helping”.
The people in Houston and surrounding areas will need many resources to recover from this event. Thankfully, our country is full of helpers who will get to work quickly.
FIRST, ARE YOU OK?
As people in Texas face the aftermath of the destruction, hopefully their advisors are in the position to help their clients with the financial cleanup. But as they say in the airline safety video, “Put your mask on first before helping others.”
Ideally, advisors have an effective disaster plan. But if they were waylaid by the storm despite their plan, they need to take care of themselves and their family. There are helpers for them too — fellow advisors not in the storm’s path.
One benefit of the financial planning profession is we have a strong network. Membership organizations such as NAPFA, FPA and AICPA are great about extending help. If you are an advisor facing a disaster, reach out to your friends in these organizations. Those not affected by the storm should also check on their peers in lower Texas.
WHICH CLIENTS, AND WHERE ARE THEY?
Disasters cause chaos, and it can be difficult to know who has sustained damage. If possible, send a short email to your entire client list stating, “We are checking on all our clients. Let us know if you are okay or if you have sustained damage from the storm. We are here to help”.
A number of clients will answer. For those who don’t, go a step further and call them. Keep a list of the clients you haven’t been able to reach and periodically ping them.
FIRST THINGS FIRST
Property and casualty agents are usually overwhelmed when major disasters strike. As a financial advisor, you can guide clients through the initial steps. Remind them of the following:
- Make only the repairs needed to prevent further damage such as covering holes in the roof. The adjuster will need to see the damage, so don’t make extensive repairs or get rid of damaged high-price items. Take plenty of pictures.
- Save all receipts for replacement housing including food costs, additional costs for transportation, and storage expenses. The client may be eligible to receive an advance from the insurance company for these expenses.
- Make a list of the damage as soon as possible. It may be helpful to draw a floorplan of the home to help recall what filled the space.
- File the claim as quickly as possible and document all interactions with insurance companies, FEMA, or anyone else related to helping with the disaster.
HELP WITH DAMAGE EXPENSES
If the damage from a storm is from the roof down, homeowner’s coverage applies. However, if the damage is from the bottom up, such as the floods in Texas, only flood insurance will pay. The National Flood Insurance Program provides basic coverage of up to $250,000 for building property and up to $100,000 for contents. Most people do not buy additional coverage.
For clients with losses not covered by insurance, other help might be available. If the area has been deemed a federal disaster by the president, they may be eligible for federal disaster relief – www.disasterassistance.gov is the go to area to research and apply for aid.
If your client owns a small business that has been affected by a disaster, the U.S. Small Business Administration provides low interest disaster loans in declared disaster areas. The application is completed online.
IMPORTANCE OF HOME EQUITY LINES OF CREDIT
If a client does not have liquidity to deal with emergencies, a home equity line is one avenue to obtain needed cash. However, a home equity line will not be approved if a home is already damaged or under repair. We encourage all clients without resources to rebuild to have a home equity line available in the event of a major disaster. I learned this the hard way when our home was destroyed by termites – thankfully, we had the savings to rebuild and quickly opened a home equity line in case a future disaster strikes.
A home equity line will not be approved if a home is already damaged or under repair.
Planners can help their clients tap other cash resources such as borrowing from retirement plans or cash value from life insurance policies. If the situation is dire, a GoFundMe account can be established to help.
Often forgotten are the tax ramifications. People who live in major disaster areas may be eligible to delay tax filings and payments without penalty. The IRS automatically identifies the people in these areas. If your client was affected but lives outside the designated areas, they need to call the IRS to request tax relief.
Remind the client to keep all records of costs related to the disaster, as these can be claimed as a casualty loss on the tax return.
The cleanup goes on long after the storm has passed. Here’s how financial planners can provide advice for one of clients’ most expensive traumas.
If there will be a significant casualty loss, make sure the client has the income to offset the loss during the tax year. This may be one area where premature distributions from retirement plans are warranted, as the casualty losses offset the taxes from the distribution. Additionally, Congress sometimes enacts special legislation that allows withdrawals from IRA funds without paying the 10% penalty.
Disasters are horrible, and ideally we’ve helped clients prepare in advance. Even the best preparation doesn’t cover everything, and your clients will appreciate anything you can do to help them recover after these catastrophic events.