Tax Issues Concerning Disaster Victims

The complete and utter devastation caused to the Gulf Coast by Hurricane Katrina was a wake-up call to people everywhere about how quickly a natural disaster can come in and turn your life upside down. If you are the victim of a disaster, and your insurance does not cover all of your damages, the IRS may be able to help. In most cases, the IRS allows disaster victims to deduct the amount of their damages on their tax returns.

There are two sets of tax rules that apply to disaster victims. One set of tax breaks apply to people who were victims of disasters like tornadoes, floods, forest fires, and mudslides, but were not affected by Hurricane Katrina. If this applies to you, the first thing you need to do is contact your insurance company and file a claim for your damages based on your policy guidelines. Once you know what your insurance company will be paying you, you can calculate the amount of the deduction you can take on your taxes. First, you must subtract $100 from the total amount of the remaining cost of damages not covered by your insurance company. To qualify for a tax break, that amount must be more than 10% of your total adjusted gross income. If it is not, you cannot claim any deductions. If it is, you must subtract 10% from your adjusted gross income. The number you are left with is the amount of the tax deduction you can take. If your area is declared a disaster area, then you can claim your tax break in the year the disaster happens, on the return for the previous year's wages, instead of waiting for the next tax cycle.

If you have been affected by Hurricane Katrina, a different set of tax deduction rules apply to you. Under the Hurricane Katrina Emergency Tax Relief Act of 2005, for you, the $100, plus 10% of your adjusted gross income reductions are lifted, and you can claim any damages not covered by your insurance whether or not they exceed 10% of your adjusted gross income. You can withdraw up to $100,000 from your IRA or qualified retirement savings account without being taxed. If you receive debt relief in any form, that debt that is erased does not count as taxable income.

If you made charitable donations in to a Hurricane Katrina relief group in 2005, there are some special tax breaks that apply to you as well. Normally, you can only make charitable donations in amounts up to 50% of your adjusted gross income, but if you donate to a Hurricane Katrina relief charity, there is no donation ceiling. If you have housed people affected by Hurricane Katrina for at least 60 days, you can claim a deduction of $500 per person, up to a limit of $2,000. The people cannot be your spouse or your dependent children.

When looking at tax relief for disaster victims, it is important to keep a few things in mind. First, the Hurricane Katrina benefits apply ONLY to Hurricane Katrina. Victims of other hurricanes are covered under the standard IRS disaster benefit rules. Next, you have to make sure your disaster meets the IRS definition of a disaster. IRS Publication 547 can give you more information on what qualifies as a disaster and what does not. Lastly, remember what "deduction" means. The deduction comes off your taxable income amount, not your tax bill. A $5,000 deduction does not mean you pay $5,000 less, it means you are taxed for $5,000 less in income. How deductions translate to a reduction in your tax bill depends on your tax bracket.

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