I've spent the past two days trying to learn more about taxes and Road Home grants, and the results are not pretty, and the IRS's policy certainly isn't fair.
In 2005 I took a casualty loss of $95,000 for our Katrina damaged home. This was calculated as follows: Cost of property $157,000, minus insurance reimbursements of $62,000=$95,000. We recorded the house as totaled because it would and has cost more than $157,000 to fix it. That year the adjusted gross income for Therese and I was $72,135. We paid nothing in taxes. If we didn't take the casualty loss, we would have paid about $5,000 in taxes for 2005. If only we would have paid those taxes!
In January of 2007 we received $120,000 in a Road Home grant. Many sources claim that we need to list $95,000 as "other income" on our 2007 tax return (Form 1040 line 21). However, according to this IRS document, that is not true. We only need to claim $72,135 because we weren't taxed on that in 2005.
Without the Road Home grant, Turbotax calculates that we'd receive a rebate of just over $3,000. When we add the $72,135 to income, we now owe the IRS $20,795 in taxes. This is because instead of our regular income of about $80,000, we now have to add $72,135 to this, putting us in a much higher tax bracket. I called the IRS hotline several times, and eventually found their casualty loss expert, but at this point I knew much more about this topic than the expert on the phone, so that didn't help. Right now we're praying that the Louisiana delegates in Congress can get a bill passed making this system more equitable. What would be fair would to reinstate the option to amend our 2005 taxes and take out the casualty loss. I'd be happy to pay interest on the original $5,000 I saved in 2005 taxes. Anyway, this has to be boring as heck for all of you not affected by the Road Home mess. What's the weather like in the Congo by the way?