Disaster Relief

IRS Postpones Tax Filings for Victims of Hawaii Wildfires

Casualty Loss Deductions: Election to Claim for Previous Year Election Deadline is October 15, 2024

For personal casualty losses caused by an event in a federally declared disaster area, and for casualty and other losses incurred in a trade or business that are due to a disaster occurring in a federally declared disaster area, a special rule allows taxpayers to claim a personal casualty loss deduction either in the year when the casualty occurred, or in the year before the casualty occurred (to get the allowable refund in the casualty year). This election usually results in a faster tax refund, and sometimes a larger one. The deadline for filing the election of which year to claim the deduction is the standard filing deadline for the current year or the deadline with extensions for the previous year.

If you have a qualified disaster loss you may elect to deduct the loss without itemizing your deductions. Your net casualty loss must exceed 10% of your adjusted gross income to qualify for the deduction. In addition you would reduce each casualty loss by $500 after any salvage value and any other reimbursement.

One downside: increase in personal casualty floor. The usual $100 per-casualty floor (personal casualty losses) is increased to $500 for qualified disaster-related personal casualty losses.

Qualified Disaster Relief Payments

Qualified disaster relief (QDR) payments (e.g., payments from FEMA) aren't taxable. QDR payments aren't subject to income or employment taxes. These are any payments (if not compensated by insurance or otherwise) made to or for an individual:

1. to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred due to a qualified disaster;
2. to reimburse or pay reasonable and necessary expenses to repair or rehabilitate a personal residence (including a rented one) or repair or replace its contents, if the work is needed due to a qualified disaster;
3. by a person who provides or sells transportation as a common carrier because of death or personal physical injuries due to a qualified disaster; or
4. if the amount is paid by a federal, state, or local government, or an agency or instrumentality of them, in connection with a qualified disaster to promote general welfare (but not if payments are made to businesses, or for income replacement or unemployment compensation)

IRA

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.

Qualified Disaster Mitigation Payments

Qualified disaster mitigation payments, which are made to lessen or avoid the effects of future disasters, are also excludable from income.

Insurance Payments

Insurance proceeds for damaged or destroyed property-special rules for determining gain. Under general income tax rules, insurance proceeds received on damaged or destroyed property are taxable to the extent they exceed the property's adjusted basis. If the proceeds are used to repair the property, or purchase qualified replacement property within two years, the gain can be deferred.

But under special rules that apply for disasters, if a taxpayer's principal residence or any of its contents are partially or completely destroyed due to a federally declared disaster, any gain from the receipt of insurance proceeds for personal property that was part of the residence contents for insurance purposes, and wasn't "scheduled property" (i.e., wasn't specifically insured property, such as jewelry, listed in the insurer's schedule) isn't subject to income tax, regardless of what it is used for. Insurance proceeds received for the home or its "separately scheduled" contents are treated as received for a single item of property (making it easier for the homeowner to replace the principal residence without recognizing gain). Also, a four-year replacement period applies, instead of the two-year period, for the election to defer gain. Also, note that the home-sale exclusion rules, which apply to involuntary conversions, often exclude involuntary-conversion gain on principal residences.

Gain may also be deferred on business assets that are replaced within two years except real estate which generally qualifies if replaced within three years.

Obtaining IRS Records

Obtaining copies of returns from IRS-recovery of lost or destroyed records. IRS waives the usual fees that apply to requests for copies of returns and expedites requests for copies of previously filed returns, for disaster area taxpayers. This relief can be especially helpful to anyone whose copies of these documents were lost or destroyed in a disaster.

Charitable Donations

Funds contributed to disaster relief must be contributed to a qualified charity for the donor to receive a tax deduction. Generally funds received from a disaster event are not taxable to the recipient. See details above for more information.

The IRS may provide additional disaster relief in the future.

Hawaii Tax Update

The State of Hawaii has released Department of Taxation Announcement No. 2023-03 (AMENDED) on August 23, 2023. The announcement outlines the various forms of relief that are available to taxpayers affected by the disaster. The relief applies to all taxes that the Department administers, including GET, TAT, net income, tobacco, and liquor. For further information, including filing instructions to request wildfire relief, kindly follow the provided link: ann23-03_amended.pdf (hawaii.gov).

Additional Resources

https://www.hawaiicommunityfoundation.org/maui-strong