Disaster Relief Withdrawals
The IRS announced that victims of federally declared-disasters (such as Hurricanes Helene and Milton) can withdraw up to $22,000 from their IRAs. This disaster tax relief for all individuals and businesses includes the entire states of Alabama, Georgia, North Carolina, South Carolina and Florida, and parts of Tennessee and Virginia.
If you are under age 59 ½, you will not have to pay a 10% early distribution penalty on these withdrawals. Further, the taxable income on these withdrawals can be spread over three years, and the funds can be repaid over three years.
Hardship Withdrawals
Your employer plan may also allow these withdrawals, but even if your plan doesn’t allow disaster-relief withdrawals, you may be able to treat a hardship withdrawal as a disaster-relief withdrawal on your federal tax return. This would allow you to avoid the 10% penalty, spread the income over three years and repay the withdrawal.
A hardship withdrawal must be for an “immediate and heavy financial need.” Most plans allow employees to automatically satisfy this requirement if their expense fits into one of seven “safe harbor” categories, including disaster-related expenses and losses. There is no dollar limit on hardship withdrawals, but withdrawing pre-tax funds subjects you to tax and the 10% penalty if you are under 59 ½.
You may also take penalty-free withdrawals from your IRA for “unforeseeable or immediate financial needs relating to personal or family emergencies.” Your employer plan may also allow emergency distributions. These withdrawals are limited to one per calendar year and are limited to $1,000.
Once an emergency withdrawal is taken, no other emergency withdrawal can be taken in the following three years unless the original distribution is repaid or future salary deferrals (for plans) or contributions (for IRAs) exceed the amount of the original distribution.
Casualty Loss Deduction
Individuals and businesses in a federally-declared disaster area may qualify for a casualty loss tax deduction. The deduction is available for damaged or destroyed property not covered by insurance or other reimbursement and can result in a larger refund. A unique feature of this deduction is that taxpayers can choose to claim it on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the prior year
Loss of Tax Records
Taxpayers whose tax records were lost or destroyed, or who need tax records to apply for disaster assistance can get free transcript of their returns from the IRS. Access is available through the Get Transcript link on IRS.gov.
Disaster Relief Payments
Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency such as FEMA for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home or replacement of its contents.
IRS Resources
IRS.gov has a variety of information to help disaster victims navigate common situations after disasters. The IRS also has a hotline specifically dedicated to taxpayers with disaster-related tax questions: 866-562-5227.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
