Income Tax Relief in Times of Disaster

Publication Date: September 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

In response to the devastation caused by Hurricane Katrina, disaster areas have been designated in 64 parishes in Louisiana, 52 counties in Mississippi, six counties in Alabama, and three counties in Florida. Special provisions are available for taxpayers to help recover from the impact of a disaster.

Generally, individuals and businesses can claim an income tax deduction for casualty losses. When the casualty losses occur in a presidentially-declared disaster area special tax provisions come into play. For example, taxpayers can shorten the amount of time it takes to receive an income tax refund by filing an amended tax return for the previous tax year to claim losses from the disaster. Another special tax rule allows for the deferral of capital gain from involuntary conversions of assets.

Taxpayers in a presidentially-declared disaster area who receive grants from FEMA, state programs, charitable organizations or employers to cover medical, transportation, or temporary housing expenses are able to exclude these grants from taxable income.

In response to Hurricane Katrina, Congress may choose to consider enacting additional tax relief. This has been the case in past disasters, notably in response to the terrorist attacks of September 11, 2001. A provision enacted by the Victims of Terrorism Tax Relief Act of 2001 allowed an exemption from income taxes for any individual who died as a result of wounds or injury incurred from the terrorist attacks, along with a few other forms of tax relief.
This report will be updated in the event of legislative or regulatory changes.