TAX PROVISION

Additional Disaster Relief is on the Way

Tax & Economic Provisions of 2021 Stimulus | January 2021

The financial damage from events such as floods, fires, hurricanes and other natural disasters can be compounded by the ongoing financial stress many are experiencing under COVID. The Act provides tax relief in a couple of ways for taxpayers experiencing hardship attributable to a loss arising from a federally declared disaster.

Under pre-Act law, individual taxpayers could claim an itemized deduction for personal casualty losses attributable to a federally declared disaster. However, each loss was subject to a $100 floor and the itemized deduction only applied to the extent the sum of all eligible net casualty losses exceeded 10% of a taxpayer’s AGI. Under the Act, such losses are now subject to a $500 floor. However, these losses will not be subject to the 10% of AGI reduction. Also, if a taxpayer does not claim itemized deductions, the net casualty losses can be added to the standard deduction.

Taxpayers under the age of 59.5 are generally subject to a 10% early distribution penalty for distributions from an employer retirement plan. The Act excludes a “qualified disaster distribution” from the 10% penalty. In addition, the taxable amount of any such distribution can be included in gross income ratably over a three-year period, beginning in the year of distribution.

A “qualified disaster distribution” is one made to a taxpayer who resides in a federally declared disaster area and suffers a loss resulting from such disaster, and is made during the period beginning with the first day of the disaster and ending 180 days after the enactment of the Act. There is a $100,000 limit, cumulative for all tax years, on the amount of distributions eligible for this relief.