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Income Exclusion For Disaster Relief Payments

September 28, 2017
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Generally speaking, if an individual receives qualified disaster relief payments from any source, including employers, that reimburses or pays the individual’s expenses incurred in connection with a qualified disaster, the payments are not taxable income and are not subject to employment taxes or withholding. Employers are permitted to deduct those payments.

Qualified Disaster Relief Payment

The term, "qualified disaster relief payment," means any amount paid to or for the benefit of an individual:

  • To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, or
  • To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence (rented or owned) or repair or replacement of its contents to the extent such need is attributable to a qualified disaster, or
  • To reimburse or pay reasonable and necessary expenses incurred for repair or replacement of the contents of a personal residence, to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

In addition, the law provides that a qualified disaster relief payment also can be an amount paid by a federal, state, or local government, or agency or instrumentality thereof, in connection with a qualified disaster, in order to promote the general welfare.

Qualified disaster relief payments will be excluded from income only to the extent that any expense compensated by the disaster relief payment is not compensated for by insurance. Also, income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation are not qualified disaster relief payments. When the employer makes disaster relief payments to employees, the payments are considered compensatory and, therefore, deductible to the employer.

Qualified Disaster

A qualified disaster is defined as a disaster that:

  • Is a presidentially declared disaster area,
  • Is an event that the Secretary of the Treasury determines is catastrophic,
  • Results from terrorist or military actions, or
  • Results from an accident involving a common carrier.

On August 25, 2017, Hurricane Harvey was named a presidentially declared disaster in the designated counties affected in Texas, retroactive to the date that the storms began on August 23, 2017. On August 28, 2017, Hurricane Harvey was named a presidentially declared disaster in the designated counties affected in Louisiana, retroactive to August 27, 2017.  Hurricane Irma was named a presidentially declared disaster on September 10, 2017 retroactive September 7, 2017 for counties affected in Florida and on September 15, 2017 retroactive September 7, 2017 for counties affected in Georgia.

Consequently, the amounts paid to victims of Hurricane Harvey and Irma in the qualified disaster areas that meet the definition of qualified disaster payments, including amounts received from employers, are excludible from the individuals’ income.

For further information on the tax implications related to the recent disasters, please contact your Citrin Cooperman advisor.