Tax Relief
Tax & AccountingMarch 09, 2021

Tax Relief from Congress and the IRS Relating to Natural Disasters and National Emergencies

(NEW YORK, NY, March 2021) - It has become fairly common since Hurricane Katrina for Congress to enact tax legislation to provide some disaster tax relief to victims of natural disasters. The casualty loss provisions of the Internal Revenue Code provide some continuing relief from federally-declared disasters, and the Internal Revenue Service on its own often announces extensions of tax filing deadlines. However, the additional tax relief provided by Congress has been usually of fairly short duration, covering only specific disasters or federal disasters during a specific period of time, usually only a year or two.

Typical of recent disaster relief provisions were those enacted at the end of 2019 in the Consolidated Appropriations Act, 2020. These provisions apply to federally-declared disasters beginning January 1, 2018 and continuing to January 19, 2020. Typically, to be eligible for relief, a taxpayer had to live in or have a connection to a qualified disaster zone, as designated in the disaster declaration.  The tax relief included:

  • Penalty-free withdrawals from retirement accounts with generous repayment or tax payment options
  • Increased loan limits from qualified plans, again with extended repayment provisions
  • An employee retention credit for employers affected by federally-declared disasters
  • An increase in the limits on qualified charitable contribution deductions related to disaster relief
  • Relaxation of some of the requirements for a casualty loss deduction
  • Extension of filing deadlines and
  • Additional low-income housing credit allocations for the disaster areas

The COVID-19 pandemic, while a federally-declared disaster, has been somewhat unique compared to natural disasters. It has no geographic boundaries, with a federal disaster having been declared in each state. It has a clear beginning date but, so far, no clear end date, unlike federally-declared natural disasters. Reflecting this unique situation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided some unique relief:

  • The economic stimulus payments and recovery rebate credits have only been done rarely in the past but were included in the CARES Act
  • The various payroll tax relief provisions of the CARES Act and The Families First Coronavirus Response Act were unique to the COVID-19 disaster, including a variant on the employee retention credit
  • The penalty-free withdrawal and expanded loan provisions from retirement accounts for the COVID-19 disaster are similar to those for natural disasters, but with these all expiring by December 31, 2020
  • The charitable contribution provisions for the COVID-19 disaster do not require that the donation be specifically for a purpose related to the disaster and a charitable deduction for non-itemizers was also added
  • Allowing employers to include student loan repayments as part of their employee education reimbursement programs was also unique

  • The waiver of required minimum distributions for 2020 was also unique to the COVID-19 disaster

  • Businesses, in addition, were allowed net operating loss carrybacks, relaxation of the loss limitations for non-corporate businesses, and relaxation of the limit on business interest deductions

In the Consolidated Appropriations Act, 2021, Congress returned to more typical forms of tax relief for natural disasters, even specifically excluding the COVID-19 disaster from some of this additional relief, although COVID-19 relief was granted through an additional economic stimulus payment and extension of some of the other tax relief granted in the CARES Act. The natural disaster period covered includes 2020 and for 60 days after the date of enactment, with enactment on December 27, 2020.

  • A fairly typical provision is provided for penalty-relief on retirement plan and loan withdrawals of up to $100,000 for those affected by the natural disaster with an end date of June 25, 2021. This includes a three-year period to pay the tax or repay the withdrawal and an extended due date for loan repayment
  • Also included is the typical employee retention credit for employers affected by the natural disaster which extends for 150 days after the last day of the incident period of the qualified disaster. A payroll tax credit is included for certain tax-exempt organizations
  • The charitable contribution limits are increased for contributions to charitable organizations involved in the disaster relief that are paid by February 25, 2021. The charitable contribution for non-itemizers is also extended for 2021, with no requirement that these charities be related to disaster relief
  • The casualty-loss provisions are relaxed with respect to the federal disaster. A new provision has been added that was not included in prior disaster relief permitting the disaster loss to increase the standard deduction, another benefit for non-itemizers
  • A low-income housing allocation is also increased for states affected by the disaster

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Mark Luscombe
Principal Federal Tax Analyst
Mark Luscombe, a CPA and attorney, is the principal federal tax analyst for Wolters Kluwer Tax & Accounting. He is the current chair of the Important Developments Subcommittee of the Partnership Committee of the American Bar Association Tax Section and speaks on a wide range of tax topics. He authors monthly columns in Accounting Today and TAXES magazine. Prior to joining Wolters Kluwer, he was in private practice with several Chicago-area law firms where he specialized in taxation.