How Natural Disasters Can Entail Tax Deductions

Get a Tax Deduction After a Disaster Damages Your Home

The intense storms this year of 2023 left a trail of destruction that caught many California homeowners off guard. It left their homes with waterlogged interiors, ruined furniture, and even structural damage. Since only two percent of California properties are covered by flood insurance and climate-related disasters are growing more frequent, it’s crucial for homeowners to understand how to access disaster-related assistance from the government.

What is the Taxpayer Certainty and Disaster Tax Relief Act of 2019?

All homeowners should be aware of an important piece of legislation called the Taxpayer Certainty and Disaster Tax Relief Act of 2019, which offers or extends tax provisions to individuals and businesses affected by disasters. Although they don’t exclusively focus on homeowners, the provisions can provide some relief and help with homeowners’ financial planning and obligations.

In this post, we’ll cover the basics of the relevant provisions in the Taxpayer Certainty and Disaster Tax Relief Act of 2019. Specific benefits may vary according to individual circumstances. Any homeowners who believe that they’re eligible for these benefits should look up a tax professional or the IRS to get more information and guidance.

Ease your tax burden with casualty loss deductions

Casualty loss deductions allow taxpayers to deduct any financial losses due to property damage from unexpected and unusual events—for the purposes of this post, we’ll focus on federally declared disasters.

Taxpayers who have suffered property damage from a federally declared disaster can claim a casualty loss deduction on their tax return for the year of the disaster or the year before.

This latter option gives individuals a chance to get their tax refunds more quickly.

What’s even better is that the Taxpayer Certainty and Disaster Tax Relief Act of 2019 removes the limitation on casualty loss deductions, which is usually based on a percentage of a taxpayer’s adjusted gross income. That means taxpayers can deduct the full amount of their qualifying casualty losses without any restriction from their adjusted gross incomes.

Tax exclusions and incentives can make a big difference

The Taxpayer Certainty and Disaster Tax Relief Act of 2019 can also have a benefit to taxpayers by excluding certain disaster-related assistance provided by the government or qualified organizations—such as grants and subsidies—from taxable income.

Business owners can benefit from the Act’s provisions that allow for accelerated depreciation of certain property in disaster-struck zones. These provisions can help them deduct a larger portion of their property’s cost to reduce taxable income and lower their tax liability.

There’s also something for homeowners who are trying to rebuild after a disaster. Although these provisions are not directly related to disaster relief, homeowners can take advantage of specific tax credits for energy-efficient home improvements. Such as installing solar panels, energy-efficient windows, and other renewable energy systems, including heating, ventilation, and air conditioning (HVAC) systems.

And there’s one more thing that might give some homeowners a feeling of relief: the Taxpayer Certainty and Disaster Tax Relief Act of 2019 extends the ability to deduct mortgage insurance premiums, which is especially useful for homeowners who use private mortgage insurance or have FHA-insured loans.

Retirement funds can be used as qualified disaster distributions

Withdrawing money from retirement plans like IRAs or 401(k)s usually means getting hit with an early withdrawal fee, however...

These penalties might be waived if the money is used to cover disaster-related expenses.

Although the disaster distributions are subject to certain conditions, individuals might be able to include them in income over a three-year period—a powerful tool in managing their tax impact.

Anyone looking into disaster distributions should also investigate expanded loan limits, which means that individuals might be able to borrow a higher amount or a percentage of their account balance. To top it all off, the usual contribution limits might not even apply to the repayment.

Tax deadlines don’t have to be disasters too

With so much to deal with in the aftermath of a disaster, it’s no surprise that taxes are often the last thing on someone’s mind. Fortunately, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 has special extensions for filing tax returns and paying taxes for individuals and businesses in disaster areas. Homeowners can have more time to manage their finances and deal with getting their lives and homes back together.

Immediate relief plus the means for long-term recovery

The Taxpayer Certainty and Disaster Tax Relief Act of 2019 can be a huge help to homeowners who are struggling to recover from a disaster. Although homeowners often have to deal with losses that go beyond simple property damage, the support from the Act’s tax credits and deductions can help ease financial strain and give homeowners breathing room during challenging times.

Still Have Questions?

If you still have questions regarding tax deductions due to a natural disaster, our team is always available to answer your questions. Send us an email at [email protected], and a member of our team will reach out to you.