The following is for informational purposes only and is not tax advice. For individualized tax advice, please consult an accountant or lawyer.
Extreme weather events are on the rise, each one carrying a lengthy and expensive recovery process for those affected. While insurance payouts, disaster relief aid, and charitable support can help in the recovery process, victims of a natural disaster might be entitled to tax relief as well.
Since the financial repercussions of a natural disaster often create both short and long-term hardship, federal tax relief can put more money in your pocket, accelerating the recovery process at a critical time.
Under the Tax Cuts and Jobs Act, only federally declared disasters have tax ramifications, and victims can check with FEMA to see if their particular event qualifies. Both government and organizational relief workers can also be eligible for tax adjustments. Bottom line, if you are a taxpayer impacted by a federally designated disaster area, there are likely tax breaks available.
In addition, Congress recently passed the Taxpayer Certainty and Disaster Tax Relief Act of 2019, which expanded tax benefits in an effort to ease the strain on victims.
While there is a lot to consider, we’ve identified some of the most important elements to maximize the potential for your tax return to bolster disaster recovery. Here are three tax implications of a natural disaster to consider before submitting your taxes.
You can have your return postponed or extended
Even the most well-organized and prepared families can have a hard time meeting the April 15th deadline for federal tax filings, and disaster victims may find this deadline difficult or impossible to achieve. Affected taxpayers can have their return postponed or extended by following a few steps:
- Call the Disaster Assistance Hotline at (866) 562-5227
- Confirm that you or your tax preparer are in a federally declared disaster area
- Provide the FEMA number of the affected county
In 2017, the IRS gave tax filing extensions to Hurricane Harvey victims, providing both a standard six-month extension and an additional six-month extension, giving affected taxpayers an extra year to get their finances in order before submitting their taxes.
This deferral program can preserve resources while also allowing victims to gather relevant documents that may have been lost during the disaster.
You can access funds in your retirement accounts
Typically, drawing money out of retirement accounts like a 401(k) before age 59.5 comes with steep tax consequences. However, taxpayers that experienced a federally declared natural disaster can draw from their retirement accounts without a tax penalty.
Individually, victims can borrow up to $100,000 from their retirement accounts to pay for damages. For disaster victims, borrowing from a retirement account can serve as a way to quickly receive an interest-free loan.
At the same time, disaster victims are exempt from many other requirements that often accompany borrowing from a retirement account, such as waiving contribution requirements that typically accompany 401(k) and 403(b) accounts.
The IRS also allows family members to receive a hardship distribution from their retirement accounts to support the recovery efforts of dependents who lived or worked in a disaster area.
You can receive casualty deductions on your tax return
Typically, deducting casualties on your tax return must occur during the year the loss occurred. However, for federally declared disasters, you can deduct the loss in the tax year before the loss occurred. Victims will need to complete Form 4684, Casualties and Thefts, to deduct the loss in the prior year.
By filing casualty losses in this way, victims can more quickly reap the tax benefits associated with a natural disaster. If you’ve already filed your taxes, it’s possible to submit an amendment to account for the loss incurred from a federally declared natural disaster.
What’s more, the 10% adjusted gross income limit doesn’t apply to federally declared natural disasters. Claimants can deduct the entire portion of the disaster loss less the amount paid by insurance and other reimbursements, as long as the amount exceeds $500.
In addition to the opportunities listed above, there are often other tax benefits, including:
- Waived fees for expedited copies of previous tax returns
- Claiming qualified disaster losses without itemizing other deductions on your return
- To minimize consequences of income loss, filers can claim earned income credit and additional child tax credit based on previous years with higher income to earn larger credits toward tax returns.
Tax concessions are one of the most tangible ways the government recognizes disaster victims, and most tax preparers and software providers have checks in place to ensure taxpayers receive them. Of course, maximizing these benefits can seem insignificant when trying to balance all the responsibilities that inevitably accompany a disaster event.
Fortunately, no survivor has to navigate their financial recovery alone. Contact Project Porchlight, and our certified experts can walk you through the process, helping you through all the challenges and obstacles.
There are a variety of federal, state and private resources available, and we want to ensure that you have every opportunity to capitalize on them to get back on your feet as quickly and painlessly as possible.