CRS Updates Report on Relief Provisions for Disaster Victims
SEP. 18, 2006
RL33642
DOCUMENT ATTRIBUTES
- AuthorsTeefy, Jennifer
- Institutional AuthorsCongressional Research Service
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-19996
- Tax Analysts Electronic Citation2006 TNT 186-27
Citations: RL33642
CRS Report for Congress
Received through the CRS Web
Order Code RL33642
Updated September 18, 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
Losses
Net Operating Losses
Gains Exempted from Income
Postponements
Tax Reimbursements
Retirement Plans -- Rollovers
Underpayment of Income Tax
Additional Resources
Permanent Tax Relief Provisions for 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.
Some tax relief provisions are available only to victims of presidentially declared disasters. 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). Other tax relief provisions are more broadly available to disaster victims regardless of the event's presidential declaration status. Descriptions of the IRC sections in this report will indicate whether certain provisions are available only for victims of presidentially declared disasters.
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.
Losses
Internal Revenue Code Section
Description
_____________________________________________________________________
Internal Revenue Code Section
Sec. 165
Losses
Description
Sec. 165 establishes the general rule that taxpayers may deduct
losses, including casualty losses, for which they are not compensated
or reimbursed by insurance or otherwise.
Secs. 165(h)(1) and 165(h)(2) place limitations on the amount of
the unreimbursed losses that individuals can deduct. 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 a. Businesses are
generally not limited in deducting losses.
Applies to individuals and businesses.
See Sec. 165(i) and Sec. 165(k) below for specific provisions
relating to losses caused by presidentially declared disasters.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 165(i)
Disaster Losses (also known as "Casualty Losses")
Description
A taxpayer who sustains a loss due to a presidentially declared
disaster may elect to deduct the 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.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 165(k)
Demolition or Relocation of Residence
Description
In the case of a taxpayer whose residence is located in an area
which 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 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.
END OF FOOTNOTE TO TABLE
Net Operating Losses
Internal Revenue Code Section
Description
_____________________________________________________________________
Internal Revenue Code Section
Sec. 172
Net Operating Loss Deduction
Description
A net operating loss (NOL) occurs when, during a tax year, a
taxpayer's allowable tax deductions are greater than the taxable
income, resulting in a negative taxable income. This generally occurs
when the taxpayer has incurred more expenses than income during the
year.
In general, a NOL may be carried back and deducted against
taxable income in the two tax yearsa 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.
Applies to individuals and businesses.
See Sec. 172(b) below for specific provisions for individuals
and businesses affected by disasters.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 172(b)
Net Operating Loss Deduction for Individuals
Description
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.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 172(b)
Net Operating Loss Deduction for Businesses
Description
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; this applies to both individuals and businesses.
See the Internal Revenue Service (IRS) publication 4492,
Information for Taxpayers Affected by Hurricanes Katrina, Rita,
and Wilma for more information.
END OF FOOTNOTE TO TABLE
Gains Exempted from Income
Internal Revenue Code Section
Description
_____________________________________________________________________
Internal Revenue Code Section
Sec. 139
Disaster Relief and Mitigation Payments Exempted from Income
Description
This provision provides for the exemption from income of any
payments 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.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 1033
Involuntary Conversions
Description
An involuntary conversion occurs 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.
Applies to individuals and businesses.
See Sec. 1033(h) below for special rules for both residential
and business property damaged by presidentially declared disasters.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 1033(h)
Involuntary Conversions: Special Rules for Personal Property
Damaged by Presidentially Declared Disasters
Description
Taxpayers whose principal residence (or any of its contents) is
involuntarily converted as a result of a presidentially declared
disaster qualify for three tax 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.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 1033(h)
Involuntary Conversions: Special Rule for Business Property
Damaged by Presidentially Declared Disasters
Description
If a taxpayer's business property is involuntarily converted as
a result of a presidentially declared disaster, the taxpayer is not
required to replace it 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.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 121
Exclusion of Gain from Sale of Principal Residence in the Event
of an Unforseen Circumstance
Description
When an individual sells a personal residence, the excess of the
sale price over the original cost, plus home 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
unforseen circumstance, the taxpayer may claim a reduced exclusion.
As listed under Reg. § 1.121-3(e)(2), unforseen 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.
Applies to individuals.
_____________________________________________________________________
Internal Revenue Code Section
Sec. 123
Payments Received Under Insurance Contracts for Certain Living
Expenses
Description
For a taxpayer whose principal residence is damaged or destroyed
by fire, storm, or other casualty, or who is denied 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.
Applies to individuals.
_____________________________________________________________________
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.
END OF FOOTNOTES TO TABLE
Postponements
Internal Revenue Code Section
Description
_____________________________________________________________________
Internal Revenue Code Section
Sec. 7508A
Authority to Postpone Certain Deadlines and Abate Interest
and/or Fees by Reason of Presidentially Declared Disaster or
Terrorist or Military Actions
Description
The IRS is permitted to postpone any deadline or statute of
limitations imposed under federal tax laws for up to one
yeara for taxpayers affected by a presidentially declared
disaster or 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.
END OF FOOTNOTES TO TABLE
Tax Reimbursements
Internal Revenue Code Section
Description
_____________________________________________________________________
Internal Revenue Code Section
Sec. 5708
Tax Reimbursement for Loss of Tobacco Products
Description
In the case of a presidentially declared disaster, the Secretary
of the Treasury 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.
_____________________________________________________________________
Retirement Plans -- Rollovers
Internal Revenue Code Section
Description
_____________________________________________________________________
Internal Revenue Code Section
Rollovers of Tax-Deferred Distributions into Retirement Plans --
Deadline Extension
Applies to sections:
Sec. 402
Employer Retirement Plans
and
Sec. 408
Individual Retirement Accounts
Description
Secs. 402 and 408 dictate that rollover distributions from tax-
deferred plans 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.
Both sections also allow for the Secretary of the Treasury to
waive the 60-day period in hardship situations where failure to waive
the deadline would be against equity or good conscience. Events that
could be considered hardships include casualty, disaster, or other
events beyond the reasonable control of the individual subject to the
rollover deadline.
Applies to individuals.
_____________________________________________________________________
Underpayment of Income Tax
Internal Revenue Code Section
Description
_____________________________________________________________________
Internal Revenue Code Section
Sec. 6654
Failure by Individual to Pay Estimated Income Tax
Description
An individual who underpays his or her estimated income tax is
subject to a 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.
Applies to individuals.
_____________________________________________________________________
Additional Resources
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.
FOOTNOTE
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
DOCUMENT ATTRIBUTES
- AuthorsTeefy, Jennifer
- Institutional AuthorsCongressional Research Service
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-19996
- Tax Analysts Electronic Citation2006 TNT 186-27
