CRS Releases Report on Tax Relief Provisions for Disaster Victims
RL33642
- AuthorsTeefy, Jennifer
- Institutional AuthorsCongressional Research Service
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-19474
- Tax Analysts Electronic Citation2006 TNT 180-64
CRS Report for Congress
Received through the CRS Web
Order Code RL33642
September 12, 2006
Jennifer Teefy
Information Research Specialist
Knowledge Services Group
Permanent Tax Relief Provisions for Disaster Victims
as Presented in the Internal Revenue Code
Summary
When natural or man-made disasters occur, there are several tax relief provisions that apply to affected taxpayers. This report focuses on permanent tax relief laws that are intended to benefit victims of both presidentially and nonpresidentially declared disasters such as hurricanes, floods, earthquakes, tornadoes, droughts, wildfires, wars, and terrorist attacks. The selected laws are summarized in table format and are arranged by different categories, including "losses," "gains exempted from income," and "postponements." For each law summarized, the table contains the corresponding Internal Revenue Code (IRC) section citation and a brief description of the provision. The descriptions are combinations of verbatim and summarized IRC text.
Contents
Introduction
Permanent Tax Relief Provisions for Victims of Presidentially Declared
Disasters
Losses
Net Operating Losses -- Businesses
Gains Exempted from Income
Postponements
Tax Reimbursements
Selected Permanent Tax Relief Provisions for Individual Victims of
Non-Presidentially Declared Disasters
Net Operating Losses -- Individuals
Gains Exempted from Income
Retirement Plans -- Rollovers
Underpayment of Income Tax
Additional Resources
Disaster Victims as Presented
in the Internal Revenue Code
Introduction
When natural or man-made disasters occur, there are several tax relief provisions that apply to affected taxpayers. This report focuses on permanent tax relief laws that are intended to benefit victims of disasters such as hurricanes, floods, earthquakes, tornadoes, droughts, wildfires, wars, and terrorist attacks. The selected laws are summarized in table format and are arranged by different categories, including "losses," "gains exempted from income," and "postponements." For each law summarized, the table contains the corresponding Internal Revenue Code (IRC) section citation and a brief description of the provision. The descriptions are combinations of verbatim and summarized IRC text.
There are two main parts to this report; the first contains a list of permanent tax provisions for affected victims of disasters that are referred to in the IRC as having been "presidentially declared." A presidentially declared disaster is defined in IRC Section 1033(h)(3) to mean "any disaster which, with respect to the area in which the property is located, resulted in a subsequent determination by the President that the area warrants assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act" (Stafford Act). Taxpayers affected by presidentially declared disasters can take advantage of certain tax relief provisions that are not available to those affected by non-presidentially declared disasters. The second part of this report contains selected tax provisions that are broadly available to individuals affected by disasters in general, not only those disasters that are presidentially declared.
In response to Hurricanes Katrina, Rita, and Wilma, Congress passed temporary enhancements to existing tax laws to provide extra tax relief to victims of these hurricanes. These modifications were part of the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). Table notes indicate where the permanent laws described in this report were enhanced by either P.L. 109-73 or P.L. 109-135.1
This report focuses solely on provisions for tax relief from disasters. It does not cover legislative actions that have created tax incentives to encourage redevelopment in disaster-affected areas, nor does it discuss tax incentives for charitable giving. Measures providing for direct funding to victims of disasters are also not included in this report. This report will be updated as warranted by legislative events.
Permanent Tax Relief Provisions for Victims
of Presidentially Declared Disasters
A presidentially declared disaster is defined in Internal Revenue Code Section 1033(h)(3) to mean "any disaster which, with respect to the area in which the property is located, resulted in a subsequent determination by the President that the area warrants assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act" (Stafford Act).
Losses
Internal Revenue Description
Code Section
Sec. 165a Sec. 165 establishes the general rule
Losses that taxpayers may deduct losses for
which they are not compensated or
reimbursed by insurance or otherwise.
See Sec. 165(i) and Sec. 165(k) below for
specific provisions relating to disasters.
Sec. 165(i) A taxpayer who sustains a loss due
Disaster Losses to a presidentially declared
(also known as "Casualty disaster may elect to deduct the
Losses") loss on his or her return for the
immediately preceding tax year in
order to receive an expedited tax
benefit. For example, a taxpayer who
suffers a disaster loss any time
during 2006 may elect to deduct it
on his or her 2005 return; if the
2005 return has already been filed,
the taxpayer may file an amended 2005
return. Otherwise, the taxpayer may
wait and deduct it on his or her 2006
return in the regular manner.
Applies to individuals and businesses.
Sec. 165(k) In the case of a taxpayer whose
Demolition or Relocation of residence is located in an area which
Residence has been determined by the President
to warrant assistance under the Stafford
Act, if,
o not later than the 120th day
after the date of such
determination the taxpayer
is ordered, by the state or
local government in which the
residence is located, to
demolish or relocate the
residence,
and if
o the residence has been
rendered unsafe for use as a
residence by reason of the
disaster,
then the loss shall be treated as
a casualty loss, as described in
Sec. 165(i).
Applies to individuals.
FOOTNOTE TO TABLE
a Secs. 165(h)(1) and 165(h)(2) place limitations on the amount
of the unreimbursed losses that can be deducted. Ordinarily, to figure a
deduction for a casualty or theft loss of personal-use property resulting from
a particular disaster, taxpayers must reduce the loss by $100 and also reduce
their total casualty and theft losses by 10% of their adjusted gross income.
Only the excess over these $100 and 10% limits is deductible. The Katrina
Emergency Tax Relief Act of 2005 (P.L. 109-73) removes these limits for
victims of Hurricanes Katrina, Rita, and Wilma on losses of personal-use
property, so that the entire amount of unreimbursed losses is deductible.
Net Operating Losses -- Businesses
Internal Revenue Description
Code Section
Sec. 172 A net operating loss (NOL) occurs
Net Operating Loss Deduction when, during a tax year, a business'
for Businesses allowable tax deductions are greater
than the taxable income, resulting in a
(see also "Net Operating Loss negative taxable income. This generally
Deduction for Individuals" in occurs when the business has incurred
the second part of this report, more expenses than revenues during the
"Selected Tax Relief and year.
Assistance for Victims of
Disasters (Non-Presidentially Generally, a NOL may be carried back and
Declared).") deducted against taxable income in the
twoa tax years before the NOL year, and
then carried forward and applied against
taxable income for up to 20 years after
the NOL year. These methods are known as
"carrybacks" and "carryovers,"
respectively.
A three-year carryback for a NOL is
allowed for small businesses and farms
that sustained NOLs due to
presidentially declared disasters.
FOOTNOTE TO TABLE
a Gulf Opportunity Zone Act of 2005 (P.L. 109-135): The portion
of a net operating loss that is a qualified Gulf Opportunity Zone loss can be
carried back to the five tax years before the net operating loss year. See the
Internal Revenue Service (IRS) publication 4492, Information for Taxpayers
affected by Hurricanes Katrina, Rita, and Wilma for more information.
Gains Exempted from Income
Internal Revenue Description
Code Section
Sec. 139 This provision provides for the
Disaster Relief and Mitigation exemption from income of any payments
Payments Exempted from Income taxpayers receive as qualified disaster
relief paymentsa or make in the case
of certain disaster mitigation paymentsb.
The provision is intended to ease the
burden on individuals affected by
terrorist attacks, specific military
actions, presidentially declared
disasters, common carrier accidents, and
other disasters determined by the
Secretary of the Treasury to be of a
catastrophic nature, or disasters
determined to warrant federal, state,
or local government assistance.
Applies to individuals.
Sec. 1033 An involuntary conversion occurs
Involuntary Conversions when one's property is destroyed,
stolen, condemned, or disposed of
under the threat of condemnation and
he or she receives other property or
money in payment, such as insurance
or a condemnation award.
Gain realized from involuntary
conversions is deferred if property is
compulsorily or involuntarily disposed
of, and reinvested in a timely manner in
property similar or related in service
or use to the converted property.
See Sec. 1033(h) below for special rules
for both residential and business
property damaged by presidentially
declared disasters.
Sec. 1033(h) Taxpayers whose principal residence (or
Involuntary Conversions: Special any of its contents) is involuntarily
Rules for Personal Property converted as a result of a presidentially
Damaged by Presidentially declared disaster qualify for three tax
Declared Disasters breaks regarding certain insurance
proceeds:
(1) Gain realized from the receipt of
insurance proceeds for unscheduled
personal property (property in the home
that is not listed as being covered under
the insurance policy) is not recognized.
(2) Any other insurance proceeds received
for the residence or its contents may be
treated as a common fund. If the fund is
used to purchase property that is similar
or related in service or use to the
converted residence (or its contents), the
owner may elect to recognize gain only to
the extent that the common fund exceeds
the cost of the replacement property.
(3) The replacement period for property
involuntarily converted as a result of a
presidentially declared disaster is four
years after the close of the first tax
year in which any part of the conversion
gain is realized.
Sec. 1033(h) If a taxpayer's business property is
Involuntary Conversions: Special involuntarily converted as a result of
Rule for Business Property a presidentially declared disaster, the
Damaged by Presidentially taxpayer is not required to replace it
Declared Disasters with property that is similar or related
in service to the original property in
order to avoid having to recognize gain
on the conversion, as long as the
replacement property is still held for
a type of business purpose and it is
acquired within the appropriate period.
FOOTNOTES TO TABLE
a A qualified disaster relief payment includes any amount paid
to or for the benefit of an individual, where the payment is not compensated
by insurance or by any other means:
(1) to reimburse or pay for reasonable and necessary personal, family,
living, or funeral expenses incurred due to a qualified disaster;
(2) to reimburse or pay for reasonable and necessary expenses incurred to
repair or rehabilitate a personal residence, to repair or replace its
contents to the extent that the need for such repair, rehabilitation, or
replacement is due to a qualified disaster;
(3) by a person engaged in the furnishing or sale of transportation as a
common carrier, due to the death or personal physical injuries resulting
from a qualified disaster; or
(4) if such amount is paid by a Federal, State, local government, agency,
or instrumentality thereof, in connection with a qualified disaster in
order to promote the general welfare.
b A qualified disaster mitigation payment is any amount paid
pursuant to the Stafford Act or the National Flood Insurance Act. The payments
must be made to or for the benefit of the owner of the property for hazard
mitigation.
Postponements
Internal Revenue Description
Code Section
Sec. 7508Aa The IRS is permitted to postpone any
Authority to Postpone Certain deadline or statute of limitations
Deadlines and Abate Interest imposed under federal tax laws for up
and/or Fees by Reason of to one year for taxpayers affected by
Presidentially Declared Disaster a presidentially declared disaster or
or Terrorist or Military Actions by terrorist or military actions. The
taxpayer actions that may be postponed
include (per Reg. § 301.7508A-1,
"Postponement of certain tax-related
deadlines by reason of presidentially
declared disaster"):
(1) the filing of any return of income,
estate, gift, employment, or excise tax,
(2) the payment of any income, estate,
gift tax, generation-skipping transfer
tax, excise tax, or employment tax
(including income tax withholding),
(3) the making of contributions to a
qualified retirement plan (including
required distributions,
recharacterization of contributions or
the rolloverb of plan assets),
(4) the filing of a Tax Court petition
for redetermination of a deficiency or
review of a Tax Court decision,
(5) the filing of a claim for credit or
refund,
(6) the filing of any suit on such claim
for credit or refund, or
(7) any other act required or permitted
under the internal revenue laws.
In addition, this provision allows the
IRS to waive or abate interest,
penalties, and additions to taxes for
periods after the date of the disaster,
terrorist or military action.
Applies to individuals and businesses.
FOOTNOTES TO TABLE
a The Katrina Emergency Relief Act of 2005 (P.L. 109-73) allows
the IRS to extend deadlines that applied to filing returns, paying taxes, and
performing certain other time-sensitive acts for certain taxpayers affected by
Hurricanes Katrina, Rita, or Wilma, ending no earlier than February 28, 2006.
b A rollover is the process of transferring the funds in one
retirement plan to another without incurring income and penalty taxes.
Tax Reimbursements
Internal Revenue Description
Code Section
Sec. 5708 In the case of a presidentially declared
Tax Reimbursement for Loss of disaster, the Secretary of the Treasury
Tobacco Products shall reimburse (without interest) the
amount of the internal revenue taxes
previously paid or determined and
customs duties paid on tobacco products,
cigarette papers, and tubes removed,
which were lost, rendered unmarketable,
or condemned by a duly authorized
official by reason of such disaster.
Reimbursements are made only if such
tobacco products or cigarette papers
or tubes were held and intended for sale
at the time of such disaster. The
payments authorized by this section
shall be made to the person holding such
tobacco products or cigarette papers or
tubes for sale at the time of
such disaster.
Applies to businesses.
for Individual Victims of Non-Presidentially
Declared Disasters
These provisions are broadly available to individual victims of both presidentially and non-presidentially declared disasters.
Net Operating Losses -- Individuals
Internal Revenue Description
Code Section
Sec. 172 A net operating loss (NOL) occurs when,
Net Operating Loss Deduction for during a tax year, an individual's
Individuals allowable tax deductions are greater than
the taxable income, resulting in a
(see also "Net Operating Loss negative taxable income. This generally
Deduction for Businesses" in the occurs when the individual has incurred
first part of this report, more expenses than income during the year.
"Available Tax Relief and
Assistance for Victims of Generally, a NOL may be carried back and
Presidentially Declared deducted against taxable income in the
Disasters.") twoa tax years before the NOL year, and
then carried forward and applied against
taxable income for up to 20 years after
the NOL year. These methods are known as
"carrybacks" and "carryovers,"
respectively.
A three-year carryback for a NOL is
allowed when an individual taxpayer
sustains a loss of property from fire,
storm, shipwreck or other casualty, or
from theft.
FOOTNOTE TO TABLE
a Gulf Opportunity Zone Act of 2005 (P.L. 109-135): The portion
of a NOL that is a qualified Gulf Opportunity Zone loss can be carried back to
the five tax years before the NOL year. See the IRS publication 4492,
Information for Taxpayers affected by Hurricanes Katrina, Rita, and
Wilma for more information.
Gains Exempted from Income
Internal Revenue Description
Code Section
Sec. 121 When an individual sells a personal
Exclusion of Gain from Sale of residence, the excess of the sale price
Principal Residence in the Event over the original cost, plus home
of an Unforeseen Circumstance improvements, is a capital gain and is
subject to tax. Gain of up to $250,000
for single taxpayers and $500,000 for
married couples filing joint returns is
excluded if the taxpayer meets a use
test (has lived in the house for at
least two years out of the last five
years) and an ownership test (has owned
the house, also for two years out of
the last five).
If a taxpayer fails to meet the use
test but experiences an unforeseen
circumstance, the taxpayer may claim a
reduced exclusion. As listed under Reg.
§ 1.121-3(e)(2), unforeseen
circumstances include the involuntary
conversion of a residence and a natural
or man-made disaster (or act of war or
terrorism) resulting in a casualty to a
principal residence.
Sec. 123 For a taxpayer whose principal residence
Payments Received Under is damaged or destroyed by fire, storm,
Insurance Contracts for Certain or other casualty, or who is denied
Living Expenses access to his or her principal residence
by governmental authorities because of
the occurrence or threat of occurrence
of such a casualty, gross income does
not include payments made from an
insurance contract to compensate or
reimburse the individual and members of
the household for living expenses
incurred from the loss of use or
occupancy of the residence. This
exclusion is limited to expenses
incurred for basic survival, such as
housing, food, transportation, etc.
Retirement Plans -- Rollovers
Internal Revenue Description
Code Section
Rollovers of Tax-Deferred Secs. 402 and 408 dictate that rollover
Distributions into Retirement distributions from tax-deferred plans
Plans -- Deadline Extension received by the employee, participant,
or beneficiary, must be transferred to an
eligible plan within 60 days in order to
avoid incurring income and penalty taxes.
Applies to sections:
Sec. 402 Both sections also allow for the
Employer Retirement Plans Secretary of the Treasury to waive the
60-day period in hardship situations
and where failure to waive the deadline
would be against equity or good
Sec. 408 conscience. Events that could be
Individual Retirement Accounts considered hardships include casualty,
disaster, or other events beyond the
reasonable control of the individual
subject to the rollover deadline.
Underpayment of Income Tax
Internal Revenue Description
Code Section
Sec. 6654 An individual who underpays his or her
Failure by Individual to Pay estimated income tax is subject to a
Estimated Income Tax penalty equal to the interest that would
accrue on the underpayment, for the
period of the underpayment.
The IRS is authorized to waive the
underpayment penalty if the
underpayment is due to casualty,
disaster or other unusual circumstance
and the imposition of the penalty would
be inequitable and against good
conscience.
The toll-free IRS disaster help line is (866) 562-5227.
IRS Publications
Tax Relief in Disaster Situations
[http://www.irs.gov/newsroom/article/0,,id=108362,00.html]
Publication 547, Casualties, Disasters and Thefts
[http://www.irs.gov/pub/irs-pdf/p547.pdf]
Publication 2194, Disaster Losses Kit for Individuals
[http://www.irs.gov/pub/irs-pdf/p2194.pdf]
Publication 2194B, Disaster Losses Kit for Businesses
[http://www.irs.gov/pub/irs-pdf/p2194b.pdf]
Publication 4492, Information for Taxpayers Affected by Hurricanes
Katrina, Rita, and Wilma
[http://www.irs.gov/pub/irs-pdf/p4492.pdf]
CRS Reports
CRS Report RS22249. Income Tax Relief in Times of Disaster, by
Pamela J. Jackson.
CRS Report RS22269. Katrina Emergency Tax Relief Act of 2005,
by Erika Lunder.
CRS Report RS22344. The Gulf Opportunity Zone Act of 2005, by
Erika Lunder.
1 See CRS Report RS22269, Katrina Emergency Tax Relief Act of 2005, and CRS Report RS22344, The Gulf Opportunity Zone Act of 2005, both by Erika Lunder, for information on additional provisions for victims of Hurricanes Katrina, Rita, and Wilma.
END OF FOOTNOTE
- AuthorsTeefy, Jennifer
- Institutional AuthorsCongressional Research Service
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-19474
- Tax Analysts Electronic Citation2006 TNT 180-64