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Office of Disaster Recovery > Federal Tax Relief for Disaster Victims Federal Tax Relief for Disaster Victims

As part of the Emergency Economic Stabilization Act of 2008, special tax provisions were made for victims of the severe storms that affected the Midwest. Indiana residents of the presidentially declared (FEMA) counties between May 20, 2008 and August 1, 2008 may be eligible depending on the type of assistance (Individual/Public Assistance) their county received. The only disaster included within this time period is FEMA disaster 1766, which was a result of the severe storms that passed through central and southern Indiana in early June 2008. Click here to view FEMA disaster 1766 county declarations.

The below are only summaries of the tax provisions; please see a tax professional for full detail.

  1. RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR ASSISTANCE
    The proposals immediately below benefit taxpayers located in all counties that are presidentially-declared (FEMA) major disaster areas determined to warrant Individual Assistance, Individual and Public Assistance, or only Public Assistance due to flooding, tornadoes, or severe storms.

    • No tax penalty for disaster-related pension withdrawals – If you live in a county declared as a disaster area and use funds from a retirement account to cover certain expenses related to disaster recovery, the 10% penalty on the withdrawal from the account is waived. Monies must be withdrawn before December 31, 2008 to qualify for the waiver.
    • Recontribution of withdrawals for home purchases – Suspends the tax penalty if you used monies from a retirement account for a home purchase and could not replace the funds in the account as a result of the disaster.
    • Loans from qualified plans – If you suffered economic loss as a result of the disaster, you may be able to double the limitation on loans from your retirement account.
    • Suspension of casualty loss limitations – A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected event. Normally, you would only be able to deduct a loss no more than 10% of your adjusted gross income. This provision eliminates the 10% limit.
    • Special lookback for EIC and Refundable Child Credit – If you lost your records in the Midwestern disasters, you can use your 2007 income to compute your 2008 eligibility for the earned income credit and child tax credit
    • Additional personal exemption for housing victims – If you housed up to 4 people dislocated by the disaster for at least 60 days, you can claim up to four additional personal exemptions of $500 per person housed on your income tax return
    • Special exclusion for certain cancellations of indebtedness – If you have debt and the debt is cancelled due to the disaster, you do not have to include this forgiven debt on your income taxes, as would normally be required by law.
    • Special capital gains tax relief for replacement property in disaster area – Currently you do not have to recognize gain on a home that is damaged or destroyed by a disaster and replaced within four years of the disaster. You do not have to recognize gain for a business replaced within 2 years. The replacement period has now been increased to 5 years for both homes and businesses as long as the home/business remains in the same county.


  2. RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR INDIVIDUAL ASSISTANCE OR INDIVIDUAL AND PUBLIC ASSISTANCE
    The proposals immediately below benefit individuals and businesses located in all counties presidentially-declared (FEMA) major disaster areas determined to warrant Individual Assistance, or Individual and Public Assistance, due to flooding, tornadoes, or severe storms.

    • Individual Tax Relief
      • Expansion of higher education tax credits – If you are an undergraduate or graduate student in an area affected by the disaster AND a recipient of the Hope Scholarship Credit or the Lifetime Learners Credit, your credit has been doubled for the 2008 and 2009 tax years.
      • Secretary of the Treasury has authority to adjust taxpayer and dependency status – The Secretary of the Treasury has the authority to ensure you do not lose deductions, credits, etc. due to displacement caused by the disaster.
      • Mortgage revenue bonds – The state is permitted to finance low-interest loans to you, if your primary residence was damaged or destroyed by the disaster occurred in 2008-2009. You can use these monies for rebuilding or repairing your home.

    • Business Tax Relief
      • Employee Retention Credit – If your business employs 200 or less individuals, is located in the disaster area and continued to pay employees though the business was inoperable, you qualify for a 40% tax credit for wages paid up to $6,000.
      • Tax-exempt bond financing – Increases bond volume for Single and Multi-family housing by approximately $3 billion for use in effected counties. These bonds may be issued below market rate loans for homebuyers or may be issued to finance construction of multi-family rental properties. This opportunity expires January 1, 2013. Visit http://www.in.gov/ihcda/ for more information.
      • Low-income housing tax credit – Increases tax credit for construction and rehabilitation of low and moderate income rental housing by approximately $24 million per year in 2008, 2009 and 2010 for use in the effected counties. Credit is available for developers of affordable housing and is allocated by the Indiana Housing and Community Development Authority.
      • Additional depreciation for new investment in Midwestern disaster area – Allows effected businesses that suffered damage to claim an additional 50% year 1 depreciation of the cost of new real and personal property investments made in the Midwestern disaster area. All these deductions would be exempt from the Alternative Minimum Tax. (Note: does not apply to certain types of property such a golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, liquor stores, or any property used directly in connection with gambling.)
      • Expensing property – Increases by $100,000 the amount of expensing available for qualified expenditures made in the disaster area prior to 12/30/2011. Also increases by $600,000 the level of investment at which tax benefits phase out. (Note: does not apply to certain types of property such a golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, liquor stores, or any property used directly in connection with gambling.)
      • Expensing for certain demolishing and clean-up costs – Your business may deduct 50% of the cost of cleanup and demolition in disaster areas. Costs must have occurred prior to 12/30/2008. Note: does not apply to certain types of property such a golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, liquor stores, or any property used directly in connection with gambling.)
      • Extension of expensing for environmental remediation costs – Extends deduction for the costs of cleaning up a qualified contamination site, if the release of hazardous materials is attributable to the disaster. Cost must have occurred prior to 12/30/2008. (Note: does not apply to certain types of property such a golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, liquor stores, or any property used directly in connection with gambling.)
      • Increase in rehabilitation costs – Increases available rehabilitation credit from 10 to 13 percent (most structures) and 20 to 26 percent (historic structures) for buildings damaged by the disaster.
      • Treatment of net operating losses attributable to disaster losses – Extends from 2 to 5 years the net operating loss carryback for expenses related to the Midwestern disaster. (Note: does not apply to certain types of property such a golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, liquor stores, or any property used directly in connection with gambling.)
      • Tax credit bonds – Authorizes state to issue debt service tax credit bonds providing credits against federal income tax instead of interest payments. The maturity of the bonds cannot exceed 2 years. The maximum amount of tax credit bonds cannot exceed $100 million for Indiana, as the state’s population is in excess of 2 million.

    • Tax Relief for Charitable Contributions
      • Temporary suspension of charitable contributions – Temporarily suspends the limits (10% of taxable income or 50% of individual’s adjusted gross income) on the deduction of charitable contributions made for Midwestern disaster relief before 12/31/2008.
      • Increase in standard mileage rate for charitable use of the vehicles – Current mileage reimbursement is 14 cents per mile. This provision increases the reimbursement rate to 70% of the business mileage rates, if you are assisting in relief efforts.
      • Income exclusion for mileage reimbursements for volunteers – Excludes from taxpayer’s income any reimbursement received for mileage attributable to Midwestern disaster. Only amounts received in 2008 will be excluded from income.