After Hurricane Katrina, it became quite common for Congress to enact tax legislation that provides tax relief for victims of natural disasters. The Internal Revenue Code's (IRC) casualty claims provisions provide for a continued exemption for federally reported disasters. The IRS, on its own, typically announces extensions on income tax reporting requirements. However, the additional tax cuts offered by Congress are usually very short-lived, only covering specific disasters or federal disasters for a certain period, typically only a year or two.
Typical aid provisions for recent disasters were issued at the end of 2019 in the Consolidated Appropriations Act 2020. These provisions apply to federally declared disasters from January 1, 2018, and continued until January 19, 2020. Typically to be qualified for relief, a taxpayer had to live or have a connection in a qualified disaster area, as stated in the disaster declaration. The tax reduction included:
Penalty-free retirement accounts with generous tax refunds or payment options
Increased loan limits for eligible plans, still with extended repayment provisions
An employee retention loan for employers affected by federally declared disasters
An increase in the allocation limits for eligible charitable contributions related to disaster relief
Relaxation of some of the casualty loss deduction requirements
Extension of submission deadlines
Additional subsidies for social housing credit for disaster areas
The COVID-19 pandemic, although a federally declared disaster, was somewhat unique to natural disasters. It has no geographic boundaries and has been declared a federal disaster in all states. It has a clear start date, but so far, it does not have a clear end date, unlike natural disasters declared by the federal government. Reflecting this unique situation, the CARES ACT (Coronavirus Aid, Relief, and Economic Security Act) provided unique relief:
Allowing employers to add student loan repayments as part of employee reimbursement programs was equally unique.
Corporations could also amortize net operating losses, reduce loss limits for non-corporate activities, and reduce business interest deductions.
Economic incentive payments and recovery credits have rarely been made in the past but have been included in the CARES act.
The COVID-19 Disaster Charitable Contribution provisions do not require the donation to be specific for purposes related to the disaster, and a charitable deduction has been added for those who did not itemize.
The increased penalties and extended loan provisions for COVID-19 disaster retirement accounts are similar to those for natural disasters, but all expired on December 31, 2020.
The various payroll tax reduction provisions in the CARES Act and the Families First Coronavirus Response Act were specific to the COVID-19 disaster, including a variant of the employee retention credit.
The waiver of the required minimum distributions (RMD) for 2020 was also specific to the COVID-19 disaster.
In the Consolidated Credit Act of 2021, Congress reverted to more typical forms of tax cuts for natural disasters, although it specifically excluded the COVID-19 disaster from such additional relief. Still, the COVID-19 relief was provided by payment and an extension of the economic incentive for some of the other tax incentives granted by the CARES Act. The period covered by natural disasters includes 2020 and 60 days from the date of enactment, with enactment on December 27, 2020.
Casualty loss provisions are relaxed due to the federal disaster. A new provision has been added, which was not included in the previous disaster relief, allowing disaster victims to increase the standard deduction, another benefit for those who do not itemize.
For those affected by the disaster with an end date of June 25, 2021, there is a fairly typical provision for waiving pension plan penalties and withdrawing the loan up to $100,000. This includes a 3-year period to repay the withdrawal or pay the tax and an extended period to repay the loan.
The limits of charitable contributions are increased for charitable contributions involved in humanitarian aid paid before February 25, 2021. The charitable contribution for those who do not itemize is also extended for 2021, without requirements that these charities be linked to disaster relief.
The subsidy for social housing has also increased for states affected by the disaster.
The usual employee retention credit for employers affected by the natural disaster is also included, which extends for one hundred and fifty days after the last day of the accident reference period. For some tax-exempt organizations, a payroll tax credit is included.
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Jim McClaflin, EA, NTPI Fellow, CTRC