Road Home Examples

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Example 1

Facts

1.In 2005, the taxpayer takes a home casualty loss, which creates a net operating loss that is carried forward to 2006.
2.In 2007, the taxpayer receives a hurricane recovery grant, which, if included in the taxpayer’s 2007 federal income, would result in additional federal income tax. No Louisiana tax would be due because the hurricane recovery grants are exempt from Louisiana income.
3.Instead of reporting the hurricane recovery grant in 2007, the taxpayer elects to amend their 2005 federal income tax return and reduce the home casualty loss to $0. The 2005 federal amendment eliminates the 2006 net operating loss carry forward.
4.Elimination of the 2006 net operating loss carry forward results in an additional 2006 federal tax liability rather than the tax liability that would be owed for 2007 if the grant was reported in that year.

Problem: Even though the hurricane recovery grants are exempt from state income tax, if the taxpayer elects to amend their 2005 and 2006 federal income tax returns to save on their federal income tax, elimination of the 2006 net operating loss on the federal return will result in additional 2006 state income tax. In effect, the taxpayer would be indirectly taxed on the 2007 hurricane recovery grant if the taxpayer elects to amend the 2005 and 2006 federal tax returns rather than report their hurricane recovery grant in 2007.

Solution: If the taxpayer elects to amend their federal returns for the years that the federal casualty losses were taken and the year that the hurricane recovery grant was received, the taxpayer will not be required to amend any of their state income tax returns.

However, if the taxpayer determines that amending their state tax return results in a reduced state tax liability, the taxpayer is allowed to file state amended tax returns—but the taxpayer will be required to amend all of the state tax returns for all periods that federal amended returns were filed. Taxpayers are not allowed to amend only selected periods.

Example 2

Facts

1.In 2007, the taxpayer received a hurricane recovery grant and reported the money on their 2007 federal income tax return but excluded it from their state tax return.
2.Due to the recent federal changes, the taxpayer amends both their 2007 federal tax return to remove the hurricane recovery grant and their 2005 federal tax return to reduce the casualty loss taken by the amount of the grant.
3.Amending the 2007 federal return will cause the state income tax to increase because the taxpayer’s federal income tax deduction is reduced.

Problem: Amending the taxpayer’s 2005 federal income tax return to offset the casualty loss by the amount of the hurricane recovery grant will increase the taxpayer’s 2005 federal and state taxable income. Since the hurricane recovery grants aren’t taxable for Louisiana, filing a 2005 amended state tax return will result in additional state income tax effectively taxing the hurricane recovery grants.

SolutionIf the taxpayer elects to amend their 2005 federal tax return to reduce the casualty loss by the amount of the hurricane recovery grant, the taxpayer will not be required to amend the 2005 state income tax return.

Please refer to RIB 08-032 for additional information.