Hurricanes, Disasters and Taxes
With the advent of August in Florida comes the inevitable peak of hurricane season. While far from being the only natural disaster that can adversely affect Floridians, hurricanes are undoubtedly one of the most common. Fortunately, several changes have been made by Federal lawmakers regarding tax policies for disaster victims.
As of late 2022, SECURE 2.0 legislation has become applicable to federally declared disasters that have taken place since January 26, 2021. One of the newest changes is that the 10% penalty on pre-age-59 ½ distributions from IRAs and other retirement plans are waived on up to $22,000 per disaster suffered. Ideally, the payout should occur within six months of the disaster’s occurrence. Tax on qualified distributions can be paid over a period of three years, should the individual not opt to pay the tax in one installment. Amounts that are re-contributed to the retirement account within the three-year period that begins the day after the disaster distribution was received are treated as if they were taxable rollovers.
Another change is that eligible people can borrow more from 401(k)s and other workplace retirement plans, up to either $100,000 or 100% of the workplace balance, with preference being given to the lesser of the two. Repayment terms can also be extended up to a year, if the plan allows for this disaster relief.
Similarly, payouts to buy a home made prior to the disaster can be re-contributed to the workplace plan or IRA, provided that the funds were not ultimately used to buy a home. As with the previous change, it is recommended that you repay the funds within six months of the federal declaration of the disaster.
Lastly, once a hurricane or other disaster occurs (like a fire, hailstorm or tornado), the Federal government usually gives affected individuals and businesses an additional amount of time to file tax returns. In some extreme instances, the Federal government might let you amend a previously filed return to get a refund or reduce your tax burden even more quickly. Look for these announcements shortly after major disasters.
While the government has lessened the burden of tax concerns in the wake of disasters, it is up to you to manage your finances in a way that allows for ease of mind, even in times of crisis such as a hurricane. With a proper tax and estate planning attorney, you can prepare yourself and your family if the worst comes to pass. While a temporary discomfort, planning out what is to be done with your estate and that of your family can save your loved ones time, money, and undue stress.