Disasters strike unexpectedly, and when they do, individuals and businesses may be eligible for special tax relief from the IRS. From postponed tax deadlines to qualified disaster payments, navigating the tax rules after a disaster can be complex. In this guide, we answer common questions on disaster-related tax issues and provide insights on how you can benefit from these relief measures.
If you or your business has been affected by a natural disaster, understanding these provisions can make a significant difference in tax planning.
What is Disaster-Related Tax Relief?
The IRS offers specific relief for taxpayers located in areas declared as disaster zones. Relief can include postponed filing and payment deadlines, penalty waivers, and provisions for accessing retirement funds early without penalties.
A “qualified disaster” is any federally declared disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. These disasters can include hurricanes, wildfires, floods, and other major incidents.
IRS Postponement of Tax Deadlines
The IRS frequently announces postponed tax deadlines for individuals and businesses impacted by federally declared disasters. These postponements apply to various types of taxes, including income, estate, and employment taxes. The IRS maintains a website with all announced disaster-related tax postponements.
Automatic 60-Day Postponement:
In cases where the IRS hasn’t provided specific guidance, taxpayers in federally declared disaster areas are entitled to an automatic 60-day extension, based on §7508A(d). This extension begins from the initial declaration date and covers six primary tax-related actions, including:
- Filing returns for income, estate, gift, employment, and excise taxes
- Making tax payments or installments
- Filing petitions with the Tax Court or appeals
- Allowing for credits or refunds
- Filing claims for credits or refunds
- Bringing suits for claims of credits or refunds
If your deadline falls within this automatic 60-day postponement, these actions are postponed without additional IRS announcements. This regulation ensures immediate relief, even in the absence of further IRS guidance.
What Acts Are Automatically Postponed?
Under IRS regulations, certain actions are postponed automatically for qualified taxpayers. These include filing tax returns, making tax payments, and filing petitions with the Tax Court, among others. Postponements are granted when a taxpayer’s deadline falls within the announced relief period.
When a second disaster declaration overlaps with an ongoing postponement period, any affected deadlines are pushed further to align with the end of the new relief period. For example, a U.S. citizen living abroad with a filing deadline affected by multiple postponements might have an extended deadline beyond the original date.
Does a Taxpayer Receive a Postponement if Their Tax Professional is in the Disaster Area?
Many assume that if a tax preparer is located in a disaster area, their clients automatically receive extended deadlines. However, this only occurs if the IRS explicitly includes this relief in its disaster guidelines.
For example, during the Israel postponements in 2024, the IRS explicitly included relief for taxpayers whose tax preparers or records are located in the disaster area. Absent this language, only taxpayers in the disaster zone directly receive postponements. Tax professionals can submit bulk requests for postponements on behalf of clients, but this is limited to certain situations.
Qualified Disaster Recovery Distributions
Disasters may lead taxpayers to use retirement funds to cover immediate expenses. Taxpayers residing in disaster areas can withdraw up to $22,000 from their retirement accounts without incurring the standard 10% penalty for early withdrawals. These recovery distributions come with several favorable terms:
- The income from the distribution can be spread equally over three years, unless the taxpayer chooses to include it all in one year.
- Taxpayers have the option to repay the distribution within three years, which can mitigate any long-term financial impact.
The distribution must be taken within 180 days of the disaster declaration, and the taxpayer must have experienced an economic loss to qualify for this relief. These distributions are reported on Form 8915-F, Qualified Disaster Retirement Plan Distributions and Repayments.
Qualified Disaster Relief Payments
For businesses and employers, the IRS offers a way to assist employees in disaster areas without tax consequences. Under §139, qualified disaster relief payments are excluded from the employee’s gross income, meaning employees do not owe taxes on this assistance. These payments can cover necessary personal, family, or living expenses caused by the disaster.
However, employers must consider two critical factors:
- Is the payment excluded from the employee’s income? According to §139, qualified disaster relief payments are not counted as taxable income for employees, allowing them to receive this support without tax liability.
- Is it deductible as a business expense? Payments made by businesses for disaster relief can often be deducted as business expenses, but they must meet certain criteria under §162 as ordinary and necessary expenses.
These payments are also not subject to employment or self-employment taxes, making them a tax-efficient way for employers to support employees during a crisis.
What Happens If Disaster Periods Overlap?
When a taxpayer is affected by multiple disasters, their deadlines may be extended further if the original postponed deadline falls within another disaster postponement period. For example, a U.S. taxpayer affected by multiple disaster declarations may see their filing and payment deadlines extended by several months or more, depending on the overlapping relief periods.
Is a Disaster Loss a “Qualified Disaster Loss”?
Under normal circumstances, personal casualty losses in disaster areas are only deductible to the extent they exceed 10% of a taxpayer’s adjusted gross income. However, if the disaster loss is a qualified disaster loss, the 10% floor is waived, and the taxpayer can claim the loss even without itemizing deductions.
It’s important to note that a loss is only considered a qualified disaster loss if Congress designates the disaster as such. The last designation of qualified disaster losses occurred with the Taxpayer Certainty and Disaster Tax Relief Act of 2019, which covered disasters between January 1, 2020, and February 25, 2021. There have been no further designations since.
Maximizing Tax Relief in Disaster Situations
Dealing with taxes in the aftermath of a disaster can be challenging, but understanding IRS relief measures can provide significant benefits. From postponed deadlines to accessing retirement funds early, disaster-related tax relief can ease financial burdens and keep your business on track.
Contact us today for expert guidance and personalized support with your tax planning.
