The federal government provides numerous tax breaks to victims of natural disasters. Have you been the victim of a federally-declared disaster? If so, this article will explain what tax relief options are available to you and how to apply for them.
With extreme weather events on the rise, more people than ever face financial challenges presented by natural disasters. Insurance payouts, disaster relief aid, and charitable support are helpful. But they may not be enough. Fortunately, if you live in a federally declared disaster area, you may also be eligible for tax relief from the government. In this article, we will cover the relief options available to affected taxpayers.
Federally declared disaster area government assistance
Federally declared disaster areas may be states and regions hit by a hurricane, tornado, wildfire, flood, earthquake, or similar natural catastrophe. In recent years, the category 4 Hurricane Laura caused over $19 billion worth of damage to the state of Louisiana. In 2020, California wildfires scorched over 4 million acres and did over $12 billion worth of damage. The Oregon wildfires of the same year destroyed over 4,000 homes across over 1 million acres, causing over $1 billion in damages.
When you’re the victim of one of these catastrophic events, finding shelter, locating food and water, and ensuring safety are your top priorities. The federal emergency management agency (FEMA) provides a disaster assistance helpline. It’s available from 7 am to 1 am EST, 7 days a week, at 1-800-621-3362. In addition, the FEMA website can help you find transitional shelter and arrange for inspectors to assess any damage you’ve sustained once it’s safe to do so. The site also provides connections to dozens of other forms of assistance, such as disaster relief loans, insurance, legal services, and nutrition assistance programs over the long term, once the rebuilding process has begun.
Federal disaster tax relief options
In addition to repairing the damage caused by a natural disaster, you will eventually have to manage financial matters, primarily insurance claims, lost wages, and taxes. Fortunately, the Internal Revenue Service acknowledges the financial impact of these catastrophic events with extended deadlines and tax relief that can put more money in your pocket at an accelerated rate. Both individuals and businesses can qualify for disaster tax relief.
Casualty loss deduction
The casualty loss deduction is the most significant source of relief the IRS provides victims in a Presidentially-Declared Disaster Area. Typically, casualty deductions on your tax return can only be taken the year the loss occurs. But the IRS provides an exception in this case. If you live in a federally declared disaster area, you can deduct the loss in the tax year before it occurred. In order to do this, victims must complete Form 4684, Casualties and Thefts. This lets them deduct the loss from the prior year’s taxes. Filing an amended return for the prior year enables taxpayers to get the refund quickly and put it to use when it’s most needed. While casualty loss doesn’t cover all hardship expenses, it does result in a lower tax obligation that can improve cash flow to help pay for recovery.
You are only permitted to deduct disaster-related losses to your home and property that are not covered by insurance or other reimbursements. Therefore, it is essential to keep all your receipts and documentation related to the damage and repair. The IRS also expects proof that the loss was caused by the disaster, so you should provide evidence as well.
As well, you must first subtract $100 from the amount of total damage done per casualty event. You must also reduce your adjusted gross income by 10%. The IRS Publication 547, Casualties, Disasters and Thefts provides details for figuring a casualty loss. Also, if you’re a taxpayer claiming the disaster loss on last year’s return, be sure to put the Disaster Designation in red ink at the top of the form so that the IRS can expedite the processing of the refund.
Note: The $100 and 10% reduction requirements do not apply to deductions for lost or damaged business or income-producing property.Also note: While taking casualty losses on your previous year’s taxes will get you a refund sooner, that’s not always your best option. Waiting to claim them on the current year’s return could result in greater tax savings. This depends on other income factors. If you do choose to file an amended return, you must do so no later than six months after the deadline for filing your original return (without extensions) for the year in which the loss takes place.
Deadline extensions for filing and paying taxes
Taxpayers in a federally-declared major disaster area can rest a bit easier knowing the IRS grants extensions for filing returns and paying taxes. The standard six month filing extension that many individuals apply for is typically granted, along with an additional six month extension for those in disaster areas. These extensions apply to a variety of tax filings, including federal income tax returns, estimated tax payments, and business tax returns. As long as you file and pay taxes before the extended deadlines, the IRS will waive late filing and late payment penalties, and associated interest.
These extended filing and tax payment deadlines also apply to individuals whose financial records were maintained and possibly lost within the declared disaster zone, even if they physically reside outside of it. Businesses are also granted additional time to send payroll taxes and file business tax returns.
In order to qualify for these extensions and waivers, be sure to do the following:
In circumstances where damage is particularly extensive, the IRS may also grant extended due dates to relief workers representing charitable and governmental organizations, even if they reside outside of the disaster zone.
By deferring federal tax returns and payments, the government allows victims time to recover, rebuild, and gather financial documents that may have been lost in the disaster.
Typically, drawing on retirement accounts like 401(k)s prematurely (before age 59 1/2) is accompanied by a stinging 10% tax penalty. However, depending on the timing of the federally declared disaster and corresponding law, affected taxpayers may be eligible to draw money from retirement accounts without penalty.
Participants taking a qualified disaster distribution can so so over three years, including equal amounts of it in their income each year. They may also repay it within three years without paying additional fees, so long as they do so by the due date. Any repayment is treated as a trustee-to-trustee transfer. Be sure to contact your retirement plan administrator for details about making such withdrawals.
Additionally, the IRS may extend deadlines for making IRA contributions for taxpayers affected by federally declared disasters. Also, under certain circumstances, retirement plans may be permitted to provide hardship distribution relief to employees and certain family members living or working in the disaster area.
For individuals who may have lost a job due to a federally declared disaster, the IRS may allow them to claim the earned income tax credit (EITC) and additional child tax credit (CTC) based on previous years with higher income. This extra credit can help lower their tax burden at a critical time.
Businesses located in a designated disaster zone may qualify for disaster relief credits if they
- Retained employees during a recovery period despite becoming inoperable, and
- Continued to pay employees unable to perform services during the qualified disaster, or relocated employees to other locations to resume their work
Tax-free donations and charitable deductions
Victims of federally-declared disasters are frequently dependent on financial aid but cannot shoulder the burden of paying taxes on it. In these situations, the IRS allows organizations to provide tax-free aid to workers. This tax break is also available to nonprofit organizations, without it interfering with their tax-exempt status.
Furthermore, charitable deductions can be claimed by individuals even if they aren’t affected taxpayers. The IRS has eliminated charitable contribution limitations to qualified charities and causes. Folks who volunteer or send supplies to victims of a federally-designated disaster can take deductions for mileage, parking, and shipping costs associated with the donated goods and supplies.
Waived fees for previously filed tax returns
The IRS takes into account the necessity of reconstructing records for tax purposes, for insurance reimbursement and obtaining federal aid after a disaster strikes. When documents have been lost, the IRS will waive the usual fees for previously filed tax returns or summaries known as tax transcripts. They will also expedite the requested copies so that victims can receive aid as soon as possible. Affected taxpayers should write the Disaster Designation in red ink at the top of Form 4506, Request for Copy or Transcript of Tax Form.
Record keeping and documentation
When submitting tax forms to the IRS, disaster-affected taxpayers should remember to include other necessary forms of documentation to limit tax exposure, such as
- payments from insurance companies
- payments from government agencies, such as FEMA
- photos and videos of damage and repairs to establish property values
The IRS does not have specific format requirements for such documents and files, so long as they provide details such as the source, date, purpose, and amount for all disaster-related transactions.
There’s no way of knowing what kind of future disasters nature will dole out. But we do know that certain areas are much more prone to major weather events like hurricanes, tornadoes, wildfires, earthquakes, and floods. Therefore, it’s always good to have a plan in place. If you live in a vulnerable area (and even if you don’t), be sure to secure all-important original documents in a waterproof, fireproof safe. Include birth certificates, titles, deeds, tax returns, insurance policies, wills, and other crucial legal documents. It’s also a good idea to download copies to a flash drive kept in a secure place (such as a safe deposit box), or store encrypted files in the cloud. Finally, keep current photos of your home and possessions, especially high-value items, to support possible future insurance claims.
- The government provides numerous tax concessions to victims of natural disasters.
- Federal tax relief for those in designated disaster areas includes deductions for casualty losses, tax deadline extensions, tax-free access to retirement funds, tax credits, tax-free donations and charitable deductions, and waived fees.
- Most software providers and tax preparers have checks in place to ensure you receive federal disaster tax relief, when applicable.
- Always consult with a tax professional for advice on claiming all your allowable deductions, credits, and other benefits.
- Be prepared for future natural disasters by securely storing important documents.
View Article Sources
- 5 IRS Tax Relief Programs That Can Help You Pay Off Tax Debt — SuperMoney
- Coronavirus (COVID-19) Financial Assistance Programs — SuperMoney
- Create a Personal Home Inventory Before Disaster Hits — SuperMoney
- Don’t Fall for Charity Scams Following Disasters — SuperMoney
- Tax Credits for Those Affected by Natural Disasters — TurboTax
- Tax Relief for Hurricane, Wildfire, Flood and Other Natural Disaster Victims — Kiplinger
- Tax Relief: Presidentially-Declared Disaster Areas — Internal Revenue Service
- The Best Tax Relief Companies — SuperMoney
- What Is The IRS Debt Relief Program and How Can You Qualify? — SuperMoney
Lara is a personal finance writer that enjoys helping people live a balanced life. She covers the essentials — think budgeting and healthcare — and the finer things in life, such as food, travel, and design. In her free time, she enjoys reading, climbing, and cooking up globe-spanning fare for her favorite people.