Taxes From A To Z (2018): R Is For Relief Funds

It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss, you won’t want to miss a single letter.

R is for Relief Funds

2017 may be remembered as a year marked by hurricanes and other disasters. From Hurricane Harvey to Hurricane Maria, combined with wildfires and tornadoes, many taxpayers across the country fought through adversity. Fortunately, many responded to various calls for assistance by supporting charitable organizations directly or through alternative platforms for giving (like this fundraiser by ProBowler J.J. Watt).

What can taxpayers who donated relief funds deduct?

For federal income tax purposes, you can only deduct contributions to qualified tax-exempt charitable organizations. Donations to individuals are never deductible for tax purposes even if the donations are earmarked for disaster relief (like to help replace a neighbor’s home). Certain qualified charitable contributions – those paid in cash or check after August 22, 2017, and before January 1, 2018, for Hurricane Harvey or Tropical Storm Harvey, Hurricane Irma, or Hurricane Maria; or after October 7, 2017, and before January 1, 2018, for California wildfires – are not subject to the 50% of adjusted gross income (AGI) limitation or the itemized deduction limitation. Check out Internal Revenue Service (IRS) Pub 976 for more details (downloads as a PDF).

What about taxpayers who receive relief funds?

Funds received from qualified charities as part of disaster relief are generally not taxable. Disaster relief grants and qualified disaster mitigation payments made under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act are also not taxable. And, qualified disaster relief payments you receive from government agencies for expenses you incurred as a result of a federally declared disaster aren’t considered taxable income.

However, just as with regular unemployment compensation, disaster unemployment assistance payments are taxable.

If you withdrew money from your retirement funds to assist with rebuilding or other disaster relief mitigation, you may be entitled to a break: Taxpayers who opt to classify distributions from certain retirement plans may elect to include those amounts in income over three years, or in the year it was received. Those distributions are not subject to the additional 10% tax (or the additional 25% tax for certain distributions from SIMPLE IRAs) on early distributions from qualified retirement plans, including IRAs. The rules for those plans follow the guidelines from those used after Hurricane Katrina (found here).

As for those casualty loss deductions? Food, medical supplies, and other forms of assistance you receive will not reduce your casualty loss unless they are replacements for lost or destroyed property. Casualty losses are generally deductible in the year the loss occurred but if you have a casualty loss from a federally declared disaster, you can choose to treat it as having occurred in the previous year. For certain 2017 disasters, including Hurricane Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires, additional special relief applies to casualty losses.

For more details about disaster relief, check out Internal Revenue Service (IRS) Pub 976 for more details (downloads as a PDF).

For your taxes from A to Z, here’s the rest of the series: