What Are Section 139 Qualified Disaster Payments?
Understand how Section 139 allows for tax-free disaster relief payments, a provision that provides key tax benefits for both payers and recipients.
The Internal Revenue Code provides specific tax relief for certain payments made to individuals affected by disasters. Section 139 of the code establishes a special exclusion for these payments, allowing individuals to receive financial assistance without incurring a federal tax liability. This provision ensures that the full amount of the support goes directly to those recovering from catastrophic events.
Defining a Qualified Disaster
For a payment to receive tax treatment under Section 139, it must be associated with a “qualified disaster.” A qualified disaster is an event that results in a federally declared disaster by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. These declarations are geographically defined, so the tax provisions only apply to individuals within the designated disaster area. The Federal Emergency Management Agency (FEMA) maintains a list of all federally declared disasters on its official website.
Qualified Disaster Relief Payments
Qualified disaster relief payments are funds provided to individuals to cover specific, necessary expenses resulting from a qualified disaster. These payments are intended to reimburse people for costs that are reasonable and necessary for them to recover. Section 139 outlines several categories of expenses that can be covered by these tax-free payments, including funds for personal, family, living, or funeral expenses that arise directly from the disaster.
The scope of these payments also extends to the costs of repairing a personal residence or replacing its contents, to the extent the damage is attributable to the disaster. For example, funds used to fix a damaged roof or replace ruined furniture would fall under this provision. The expense must be a direct consequence of the disaster and not for improvements beyond restoring the property to its previous condition.
Qualified disaster relief payments cannot be used as a substitute for wages or to replace lost business income. If an employer continues to pay an employee their regular salary while they are unable to work, those payments are considered taxable wages. Any expenses that are already compensated for by insurance or other means are not eligible for this tax-free treatment, as the purpose is to cover unreimbursed losses.
The IRS recognizes the difficulty in tracking every expense during a chaotic time. As a result, individuals are generally not required to provide a detailed accounting of their actual expenses to receive the tax exclusion. This is conditioned on the expectation that the payment amount is reasonably commensurate with the expenses the individual likely incurred.
Tax Implications for Payers and Recipients
For the recipient, the most significant advantage is that these payments are excluded from their gross income. This means the funds are not subject to federal income tax, nor are they subject to employment taxes like Social Security and Medicare. The money received is for the individual’s use in their recovery efforts.
For the payer, which is often an employer assisting its employees, these payments are generally considered a deductible business expense. They are treated as ordinary and necessary costs of conducting business, allowing the employer to reduce its own taxable income. This encourages businesses to provide financial support to their workforce.
Because these payments are not considered wages, employers must not include them in an employee’s taxable income reported on their Form W-2. The payments are handled separately from payroll, ensuring they maintain their tax-favored status for both the employer and the employee.