How Does Hurricane Tax Relief Work?

When major hurricanes strike, the federal government often provides financial assistance through special tax provisions authorized by Congress. This relief allows affected individuals and businesses to keep more of their money, easing the economic burden caused by the storm. These measures are specifically for taxpayers in federally declared disaster areas who have suffered economic losses.

Eligibility for Relief

To qualify for this tax relief, your primary home or business must be in a federally declared disaster area. You can verify if your location is included by visiting the disaster declaration page on the Federal Emergency Management Agency (FEMA) website, which lists all eligible counties. This verification is a necessary first step before claiming any benefits.

An “affected individual” is someone whose principal residence is in a designated disaster zone and who has sustained an economic loss because of the hurricane. For businesses, eligibility requires having conducted active operations in the disaster area and suffering economic harm, such as property damage or being forced to temporarily close.

Key Tax Relief Provisions

Casualty Loss Deduction

A provision allows taxpayers to more easily deduct personal casualty losses on their federal income tax returns. Normally, this deduction is limited to the amount of loss that exceeds 10% of your Adjusted Gross Income (AGI), but this limitation is waived for qualified disasters. This change makes the deduction accessible to more taxpayers, including those who do not itemize.

Instead of the AGI threshold, the loss is reduced by a $500 floor per casualty. For example, if you have an uninsured loss of $15,000, you could potentially deduct $14,500. Taxpayers who take the standard deduction can claim this as an additional amount, and this treatment applies only to losses not reimbursed by insurance.

Retirement Plan Access

The SECURE 2.0 Act of 2022 made easier access to retirement funds a permanent feature of the tax code for all federally declared major disasters. Eligible individuals may withdraw up to $22,000 from a 401(k) or an Individual Retirement Account (IRA) without the usual 10% early withdrawal penalty. This is called a “qualified disaster distribution” and is available to those who suffered an economic loss in a designated disaster area.

Taxpayers can spread the income tax from the withdrawal over a three-year period. Alternatively, if you repay the distribution to a retirement plan within three years, you can avoid the income tax by filing an amended tax return. The law also permits increased loan limits from employer-sponsored plans, raising the maximum from $50,000 to $100,000 for affected individuals.

Disaster-Area Employee Retention Credit

For businesses, Congress sometimes authorizes an employee retention credit to help employers who were inoperable due to a hurricane but continued to pay their employees. This credit is not a permanent provision and must be enacted by new legislation for a given disaster.

To be eligible, an employer must have conducted an active trade or business within the disaster zone. The credit applies to wages paid after the business ceased operations due to storm damage but before it resumed significant operations. For example, past legislation offered a credit of 40% of the first $6,000 in wages, for a maximum credit of $2,400 per employee.

How to Claim Hurricane Tax Relief

To claim a personal casualty loss, you must complete and attach IRS Form 4684, Casualties and Thefts, to your federal tax return. It is important to write the name of the hurricane and the FEMA disaster declaration number at the top of the form.

For those who took a qualified disaster distribution from a retirement account, Form 8915-F, Qualified Disaster Retirement Plan Distributions and Repayments, is required. This form is used to report the distribution and to notify the IRS if you choose to spread the income over three years or have made repayments.

When filing your main tax return, Form 1040, you should also write the hurricane name at the top in bold letters. Employers seeking an authorized Employee Retention Credit must file the appropriate payroll tax forms, such as an amended Form 941-X.

Important Deadlines and Filing Extensions

The IRS often provides automatic extensions for filing tax returns and making tax payments to taxpayers in federally declared disaster areas. Deadlines for filing and paying that fall within a specific postponement period are extended.

The period to take a qualified disaster distribution from a retirement plan is also time-sensitive. These distributions must be made within a window that begins on the first day of the disaster incident period and ends 179 days after the disaster declaration date.

You have a three-year period, beginning on the day after you receive the distribution, to repay the funds to a retirement plan. Taxpayers choosing to deduct their casualty loss in the preceding tax year must make that election within six months of the original due date of their return for the disaster year.