With the storm and power outages last week, Texas has been declared a Federal Disaster. What does this mean?
When a state is declared a federal disaster area by the President of the United States, it triggers a series of federal assistance measures under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This declaration is significant for tax purposes because it often allows for specific tax relief measures to be implemented to aid individuals and businesses affected by the disaster. The following are a few of the normal relief measures. Until the IRS makes an official announcement, we won’t know for sure what will apply for this disaster, but it is worth being informed.
Tax Implications and Relief Measures:
- Filing and Payment Extensions: The IRS often grants additional time to file returns and pay taxes. This relief is automatically provided to taxpayers whose address of record is located within the disaster area. The specific extensions can vary depending on the severity and type of disaster.
- Casualty Loss Deductions: Taxpayers in federally declared disaster areas can claim casualty losses on their federal income tax returns. A casualty loss can result from the damage, destruction, or loss of property due to the disaster. These losses can be claimed even if they do not itemize deductions. Importantly, losses can be claimed on the tax return for the year the disaster occurred or for the previous year by filing an amended return, which can provide quicker tax refunds.
- Waiver of Penalties: The IRS may waive penalties for late filing and payments for taxpayers in declared disaster areas who act in a reasonable timeframe as specified by the IRS announcements.
- Disaster Loss Carryover: Losses that exceed income can be carried over to future tax years, providing tax relief in subsequent years.
- Qualified Disaster Relief Payments: Payments received from the government or other sources to help individuals cope with disaster-related expenses are generally excluded from taxable income. These payments must be used for necessary expenses and cannot be compensation for lost income.
- Retirement Plans and IRAs: Special rules apply to those affected by federally declared disasters concerning the use of retirement funds. Affected taxpayers may be allowed to make withdrawals without the usual penalties, and repayment options may also be available.
- Charitable Contributions: Special provisions may apply that encourage charitable contributions for disaster relief, including temporary suspension of limits on charitable contributions.
What should you do?
We recommend saving any receipts for any repairs or damage that were a direct result of the disaster as these may be helpful when it comes to your tax filing. This relief may also only apply in certain counties. As we receive any official notices, we will keep you informed!
Additional Readings:
https://www.ftb.ca.gov/forms/misc/1034.pdf
https://www.irs.gov/about-irs/planning-for-disasters
https://www.irs.gov/DisasterRelief
https://www.irs.gov/pub/irs-pdf/p1693.pdf
