When Superstorm Sandy made landfall in New Jersey, it is doubtful that many of the residents there, or in the other New England states, were thinking about taxes. It is in the aftermath of a major storm with the devastation clear that those in need start searching for tax breaks.
Sandy left a death toll in the double digits and estimated damage to public, residential and commercial property in the billions. Included in the statistics are hundreds of homes lost, and thousands without power. The impact is in line with other historical storms such as Ivan and Katrina. As things start to settle and the worst hit areas begin the long, tedious rebuilding process, residents will be looking to government tax breaks for help.
Immediate Relief on Tax Payments
Immediately after the disaster, the IRS made the decision to defer the individual income tax payment deadline. Those owing payments initially had a cut-off date of January 15,2013. The deadline is extended to February 1 to give anyone caught in the wake of Sandy some breathing room. In addition, the IRS has made it clear that they will provide assistance and be lenient even for those outside the area.
To coincide with the individual tax relief, the government is waiving penalties for businesses who fail to deposit federal payroll and excise taxes on time.
Taxation on Assistance
Getting funds to rebuild is one of the most challenging parts of recovering from a disaster of this magnitude whether replacing the roof or rebuilding an entire structure. For most, homeowner’s insurance will cover the repairs, though flooding wasn’t covered for many.
For work that goes beyond this coverage, victims may meet the criteria for tax-free grants and loans from FEMA. Section 139 of the federal tax code states that qualified grants and payments from the federal government or an employer are tax-free.
The tax-free status only applies for work not covered by homeowner’s insurance. In situations where funds go to pay for loss listed on the insurance policy, tax is due on federal loans or grants. In addition, money received to reimburse income is taxable in most cases.
Victims should plan to reinvest insurance payments into their business or home. If, for example, a business closes and the owner uses the insurance for personal issues, that money may be taxable. Homeowners that use money from their insurance for anything other than home repair will owe taxes, as well.
Many people will expect to make claims under the casualty-loss deduction. In this instance, that will not apply in most cases. The insurance company payout reduces the amount of the loss. The cost of loss not covered by the policy must exceed 10 percent of the taxpayer’s adjusted gross income plus a deductible in order for casualty-loss to be valid. There are other restrictions as well that make this an unlikely break for Sandy victims.
The good news is that Congress forgave the 10 percent rule in wake of Katrina and may make the same call for Sandy.
Tax laws are complex under the best circumstances. The most effective advice that anyone can give to people recovering from this devastating storm is to get professional assistance at tax time. The IRS has made adjustments in the past after a disaster and may make further changes in lieu of the mass property claims inevitable with Sandy.An IRA Owner's Manual or if you'd prefer the Kindle version (and let's face it, ALL the cool kids do!), you can find that at this Kindle version link.