The IRS offers many benefits for tax-paying property owners and business owners after a natural disaster hits. Discover what specific tax breaks you’re eligible for.
When a natural disaster strikes, your first thought is usually the safety of you and your family. But as a result of a natural disaster, people can experience a devastating loss of property, including damage to their family home and vehicles.
In the aftermath, people may wonder if they’ll have to pay the same taxes as before. Here, we’ve gathered common questions property owners have about natural disasters and taxes and listed some tax breaks you might be eligible for.
What Is Considered a Natural Disaster?
IRS tax designations determine whether or not the natural event that affected your home or business and surrounding region is considered a natural disaster.
If the place you live in is a federally declared natural disaster area, then you’ll likely qualify for tax relief. These benefits aren’t just limited to individuals; business owners, business entities, sole proprietors, or any shareholder in an S Corporation may also qualify for tax relief if their business is in the affected area.
FEMA’s website has a section dedicated to natural disasters — you can search for declared disasters and emergencies by state and learn about applying for financial assistance.
Tax Relief Available
There are a few common federal tax relief exemptions for individuals and businesses currently in disaster areas. At the state level, disaster relief amounts vary, so it’s better to check with your state government or a tax attorney for exemptions available to you.
Through tax relief measures, you may be able to:
Access Retirement Accounts Without Penalty
Many retirement accounts have tax penalties for early withdrawals; however, if you’re in a disaster area, you may qualify to withdraw funds — penalty-free — to help rebuild. Those who qualify may borrow up to $100,000 from certain employer retirement plans (such as a 401(k) or IRA), which is double the normal limit, or 50% of the vested total in the account. Individuals are also exempt from the 10% penalty of early withdrawal. If these funds are used to purchase a new home or repair an existing one, individuals can return the money with no penalty as long as they meet certain deadlines.
Use the Prior Year’s Income for EIC and Child Tax Credit
Those in affected areas may be eligible to use the previous year’s income for an Earned Income Credit or a Child Tax Credit. This is beneficial for lower-income families who may be unable to work due to a natural disaster.
Obtain a Tax Extension
If you or your tax preparer is located in a natural disaster area, then you qualify for an extension. You may not have to physically live in the affected disaster area to apply for this extension. If you have a tax preparation specialist in an affected disaster area and your records are in that office, you’ll likely be granted an extension until the tax preparer can reconstruct your records.
To obtain a tax extension because of a natural disaster, you can:
- Call the Disaster Hotline (866) 562-5227
- Note where the necessary tax records are located (the name of the disaster area)
- Give FEMA the Disaster Number of the county in which your tax preparer is located
Benefit from Casualty Deductions
If your home is damaged in a natural disaster, you can deduct the cost of the damages from your taxes. To be eligible, you must file an insurance claim and retain the insurance company’s paperwork for the IRS. Keep all receipts from the repairs as well.
Homeowners can either use this tax credit on the tax year that the disaster occurred or amend a previous return (the one from the year before the natural disaster), whichever is more favorable. Be sure to check the guidelines from the IRS to ensure that you amend a return correctly.
If you choose to amend a prior year’s return, you have up to six months from the disaster date to do so. Use Form 1040X and you’ll be eligible for a refund of the taxes paid after the refund is issued, which can help you rebuild.
Choose a Higher Threshold for Charitable Deductions
For people who donate to affected federal disaster areas, the amount donated doesn’t have a cap. Likewise, those who volunteer to help rebuild or aid others may be able to deduct their volunteer hours, mileage and other expenses.
No matter where you live, it’s important to be prepared for a natural disaster before one strikes. This might mean stocking up on bottled water and canned goods and making sure you have other important documents secure.
Secure Vital Documents
Choose a safe area to keep backups of important documents, such as birth certificates, Social Security cards, marriage licenses and wills. Where should you keep them? You can try using a bank safe deposit box in a different location or keep them in a small fireproof safe in your own home. You may also consider going the digital route: you can take photos of important documents and store them in the cloud or on a USB drive as a backup.
Obtain an Insurance Policy
Choose your insurance policy carefully. Look at the coverage for natural disasters in your area, and if you don’t understand the terms, ask a third party to explain what’s covered. If you don’t have adequate coverage for your home and property, consider looking for a supplemental insurance policy. This is particularly important if you live in a state that experiences natural events more frequently, such as Texas and California.
Take current photos of your home and update them annually or after a remodel or renovation. Keep a record of other valuable property as well, such as jewelry or antiques.
Not every disaster, insurance policy, and tax break is the same. It’s important to understand what your state will cover and be aware of federal tax exemptions that you’re eligible for. If you still have questions, consider consulting with a professional tax attorney.