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Tax Law Changes Related to National Disaster Relief

FS-2009-8, January 2009

(Updated June 21, 2010 — For information regarding the filing of 2009 income tax returns, refer to the last section of this document, "Reporting Losses from a Federally Declared Disaster Occurring in 2010.")

The National Disaster Relief Act of 2008, Subtitle B or Title VII of the Emergency Economic Stabilization Act of 2008, signed into law on Oct. 3, 2008, as Public Law 110-343, provides tax relief for victims of federally declared disasters occurring after
Dec. 31, 2007, and before Jan. 1, 2010.

Prior to enactment of the National Disaster Relief Act, when a major disaster struck, Congress would draft legislation providing targeted tax benefits for taxpayers affected by the disaster that were specific to that particular disaster.

The National Disaster Relief Act, which provides a broad package of tax benefits that may be used by anyone who is affected by a federally declared disaster, effectively replaces the strategy of providing targeted benefits for disaster victims in the weeks or months following the incident. Certain provisions of the National Disaster Relief Act of 2008 do not apply to the Midwestern disaster areas –– disasters affecting the Midwest that were declared from May 20, 2008 through July 31, 2008 –– because the Heartland and Hurricane Ike Disaster Relief Act, part of the same legislation that resulted in the National Disaster Relief Act, provides other tax benefits. See Publication 4492-B for detailed information on the tax benefits that apply to the Midwestern disaster areas. 

The National Disaster Relief Act provides the following tax benefits: 

  • Allows all taxpayers, not just those who itemize, to claim the casualty loss deduction regardless of the taxpayer’s adjusted gross income level;
  • Increases the amount by which all individual taxpayers must reduce their personal casualty losses from each casualty from $100 to $500 for taxable years beginning after Dec. 31, 2008. The reduction amount returns to $100 for taxable years beginning after Dec. 31, 2009;   
  • Removes the requirement that the net casualty loss deduction be allowed only if the casualty loss exceeds 10 percent of the taxpayer’s adjusted gross income;
  • Provides a five-year net operating loss (NOL) carryback for qualified natural disaster losses.
  • Waives certain mortgage revenue bond requirements for affected taxpayers and allows the bond proceeds to be used for rebuilding.

For business taxpayers, the Act also:   

  • Allows an affected business taxpayer to deduct certain qualified disaster cleanup expenses;
  • Allows an affected business taxpayer to deduct 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available; and
  • Increases the limits that an affected business taxpayer can expense for qualifying section 179 property.

Major portions of the National Disaster Relief Act are highlighted below.

See Publication 547, Casualties, Disasters, and Thefts, for information necessary in preparing 2008 tax returns. 

Section 706: Losses Attributable to Federally Declared Disasters

Section 706 of the National Disaster Relief Act provides relief to individual taxpayers whose personal-use property was damaged or destroyed by a casualty in a federally declared disaster area. 

Under prior law, individuals who suffered casualty losses as a result of a Presidentially-declared disaster –– the term was redefined as “federally declared disaster” in the legislation –– were required to reduce the loss from each casualty event by $100 and reduce the total of their casualty losses for the tax year by 10 percent of their adjusted gross income. In addition, these individuals were required to claim their casualty losses as an itemized deduction. 

The new law removes the 10 percent of adjusted gross income limitation for net disaster losses and allows individuals to claim the net disaster losses even if they do not itemize their deductions. 

To qualify, a loss must be attributable to a federally declared disaster and occur in an area determined by the President to warrant federal assistance. A federally declared disaster is any disaster subsequently determined by the President to warrant assistance by the federal government under the Stafford Act. The deduction is limited to the “net disaster loss” which consists of the excess of personal casualty losses attributable to a federally declared disaster over personal casualty gains. The new law is effective for disasters declared in taxable years beginning after Dec. 31, 2007, and occurring before Jan. 1, 2010. Information on disaster declarations and the areas they encompass may be found at the Federal Emergency Management Agency (FEMA) Web site.

The new law also changes the amount by which all individual taxpayers must reduce their personal casualty losses from each casualty from $100 to $500. This change is effective for taxable years beginning after Dec. 31, 2008. The reduction amount returns to $100 for taxable years beginning after Dec. 31, 2009.   

For more information on these tax law changes, see Publication 547, Casualties, Disasters, and Thefts.

Section 712 provides that these changes to the law do not apply to the casualty losses in the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008. See Publication 4492-B for more information on the Midwestern disaster areas.

Section 707: Expensing of Qualified Disaster Expenses

Section 707 of the National Disaster Relief Act allows taxpayers to elect to currently deduct qualified disaster expenses in the tax year paid or incurred. Qualified disaster expenses consist of expenditures paid or incurred in connection with a trade or business or with business-related property that otherwise must be capitalized and that are:

  • For the abatement or control of hazardous substances that were released on account of a federally declared disaster;
  • Debris removal or demolition of structures on real property damaged or destroyed by a federally declared disaster; or
  • For the repair of business-related property damaged by a federally declared disaster. 

As previously explained, a federally declared disaster is any disaster subsequently determined by the President to warrant assistance by the federal government under the Stafford Act. This provision is effective for amounts paid or incurred after Dec. 31, 2007, in connection with disasters declared after that date and federally declared disasters occurring before Jan. 1, 2010. 

Section 712 provides that these changes to the law do not apply to the casualty losses in the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008

Section 708: Net Operating Losses Attributable to Federally Declared Disasters

In general, a net operating loss is carried back two years and carried forward 20. Section 708 of the National Disaster Relief Act allows taxpayers to carry back a qualified disaster loss five years. A qualified disaster loss is the lesser of the taxpayer’s net operating loss for the taxable year or the sum of the following:

  • The taxpayer’s losses allowable under section 165 of the Internal Revenue Code for the taxable year attributable to a federally declared disaster occurring before Jan. 1, 2010, and occurring in a disaster area; and
  • The taxpayer’s deduction for the taxable year for qualified disaster expenses allowable under section 198A(a) of the Internal Revenue Code (or the amount that would have been allowable if the taxpayer deducted qualified disaster expenses). 

A qualified disaster loss is treated a net operating loss that is separate from the taxpayer’s regular NOL. 

Section 708 also includes a provision that allows taxpayers to elect to disregard the five-year carryback rule for their qualified disaster loss. . 

Finally, Section 708 provides an exception to the general rule that a taxpayer may use an alternative minimum tax (AMT) net operating loss deduction to offset only 90 percent of the taxpayer’s alternative minimum taxable income. Section 708 provides that the 90-percent limit does not apply to the portion of the AMT net operating loss deduction attributable to a qualified disaster loss. 

These rules apply to disasters declared in taxable years beginning after Dec. 31, 2007.  

Section 712 provides that these changes to the law do not apply to the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008.

Section 709: Waiver of Certain Mortgage Revenue Bond Requirements Following Federally Declared Disasters

Section 709 of the National Disaster Relief Act adds new paragraph 12 to section 143(k) of the Internal Revenue Code, which waives certain mortgage revenue bond requirements otherwise applicable where an affected taxpayer’s principal residence is destroyed or damaged as a result of a federally declared disaster. An earlier law, the Housing Assistance Tax Act of 2008 enacted on June 30, 2008, also added a different §143(k)(12) to the Code. So currently there are two §143(k)(12)s in the Code.

New Code section 143(k)(12)(A) provides that, at the election of the taxpayer, if a person’s principal residence is destroyed –– the home is rendered unsafe for use as a result of a federally declared disaster occurring between Dec. 31, 2007 and Jan. 1, 2010, or the home is demolished or relocated because of an order issued as a result of such federally declared disaster occurring during such timeframe –– then for two years following the date of such disaster, the three-year requirement of section 143(d)(1) does not apply and the purchase price requirement is relaxed. Accordingly, such person may receive a mortgage loan financed with the proceeds of tax exempt qualified mortgage bonds regardless of whether he owned his principal residence within three years of receiving such mortgage loan, and such mortgage loan may be for the acquisition of a home which costs 110 percent of the average area purchase price. 

New Code section 143(k)(12)(B) provides that, at the election of the taxpayer, if a person’s principal residence is damaged as a result of a federally declared disaster occurring after Dec. 31, 2007, and before Jan. 1, 2010, any loan taken by such person to repair or reconstruct such residence in an amount equal to the lesser of the cost of such repair or reconstruction or $150,000 may be treated as a qualified rehabilitation loan and thus may be financed using the proceeds of tax-exempt qualified mortgage bonds. An election, once made, cannot be revoked unless permission is granted by the Secretary. 

Section 709 further provides that a taxpayer who makes a section 143(k)(12) election  may not also elect to apply the special rules for residences located in disaster areas found in Code section 143(k)(11). The special rules found in Code section 143(k)(11) allow taxpayers to use the proceeds of tax exempt qualified mortgage bonds issued between May 1, 2008, and Jan. 1, 2010, to finance mortgage loans for residences located in disaster areas for two years from the date of the applicable disaster declaration without regard to the three-year requirement by treating the residence as if it were a targeted area residence for purposes of the purchase price requirement and the income requirements. This provision, unlike § 143(k)(12), does not limit the financing only to those taxpayers whose homes were damaged by the disaster.

Section 712 provides that these changes to the law do not apply to the Midwestern disaster areas declared during the period beginning on May 20, 2008, and ending on July 31, 2008.

Section 710: Special Depreciation Allowance for Qualified Disaster Property

Section 710 of the National Disaster Relief Act provides a special 50 percent depreciation allowance for purchases of qualified disaster assistance property. It allows taxpayers to deduct 50 percent of the cost of qualified disaster assistance property in addition to the regular depreciation allowance that is normally available.

This new special “bonus depreciation” allowance applies to most types of tangible personal property and computer software acquired on or after the date on which the federally declared disaster occurs, and placed in service on or before Dec. 31 of the third year following the date on which the federally declared disaster occurs. In addition, the new bonus depreciation allowance applies to most nonresidential real property and residential rental property acquired on or after the date on which the federally declared disaster occurs, and placed in service on or before Dec. 31 of the fourth year following the date on which the federally declared disaster occurs.

To qualify for the new bonus depreciation allowance, 80 percent or more of the use of the property must be in the disaster area and in the active conduct of a trade or business by the taxpayer in that disaster area. Also, the property owner must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the federally declared disaster and must be similar in nature to, and located in the same county as, the property being rehabilitated or replaced.

Section 711: Increased Expensing for Qualified Disaster Assistance Property

In general, a taxpayer may elect to expense up to a certain amount or dollar limit of section 179 property placed in service during the tax year. However, this dollar limit is reduced, but not below zero, if the cost of section 179 property placed in service during that year exceeds a certain amount, or reduced dollar limit. For 2008, the dollar limit is $250,000 and the reduced dollar limit is $800,000.

Section 711 of the National Disaster Relief Act increases the limits that businesses can expense for qualified section 179 disaster assistance property. Generally, the new law increases the dollar limit that is normally available for a particular tax year by the lesser of $100,000, or the cost of qualified section 179 disaster assistance property placed in service during that year. Also, the new law generally increases the reduced dollar limit that is normally available for a particular year by the lesser of $600,000, or the cost of qualified section 179 disaster assistance property placed in service during that year.    

Qualified section 179 disaster assistance property is section 179 property that is qualified disaster assistance property for purposes of the new bonus depreciation allowance provided under section 710 of the National Disaster Relief Act. Section 179 property is most types of tangible personal property and off-the-shelf computer software.

The new law did not change the amount that a taxpayer can elect to expense for certain sport utility vehicles and certain other vehicles placed in service during the tax year.  Accordingly, a taxpayer cannot elect to expense more than $25,000 of the cost of these types of vehicles.

Section 712: Coordination with Heartland Disaster Relief

Section 712 of the National Disaster Relief Act explains that certain provisions contained in the National Disaster Relief Act do not apply to the Midwestern Disaster Areas. For information specific to the Midwestern Disaster Areas, see Publication 4492-B.

Reporting Losses from a Federally Declared Disaster Occurring in 2010

The National Disaster Relief Act of 2008, Subtitle B or Title VII of the Emergency Economic Stabilization Act of 2008, provided enhanced tax relief for victims of federally declared disasters occurring after Dec. 31, 2007, and before Jan. 1, 2010. Those provisions are not effective for disasters occurring after Dec. 31, 2009. Legislation extending the provisions to disasters occurring before Jan. 1, 2011, has been proposed but has not yet been signed into law.

Because the enhanced casualty loss provisions are not effective for federally declared disasters occurring after Dec. 31, 2009, taxpayers affected by federally declared disasters in 2010 may take the loss into account for tax year 2009. See Page 12 of the 2009 version of Publication 547 for information on elections to deduct disaster losses in the year preceding the disaster year, including the time limits on making such elections.

This means, if you are an affected taxpayer with respect to a federally declared disaster occurring after Dec. 31, 2009, you may claim the loss on your 2009 income tax return. Claiming a loss on your 2009 return will allow you to take advantage of the National Disaster Relief Act provisions effective for tax year 2009. 

Page Last Reviewed or Updated: 20-Mar-2014

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Filelate 15. Filelate   Estimated Tax Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Special Estimated Tax Rules for Qualified FarmersQualified Farmer Special Rules for Qualified Farmers Estimated Tax Penalty for 2013 What's New Net Investment Income Tax. Filelate . Filelate  For tax years beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). Filelate NIIT is a 3. Filelate 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. Filelate NIIT may need to be included when calculating your estimated tax. Filelate For more information, see Publication 505,Tax Withholding and Estimated Tax. Filelate Additional Medicare Tax. Filelate  For tax years beginning in 2013, a 0. Filelate 9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income over a threshold amount based on your filing status. Filelate You may need to include this amount when figuring your estimated tax. Filelate For more information, see Publication 505. Filelate Introduction Estimated tax is the method used to pay tax on income that is not subject to withholding. Filelate See Publication 505 for the general rules and requirements for paying estimated tax. Filelate If you are a qualified farmer, defined below, you are subject to the special rules covered in this chapter for paying estimated tax. Filelate Topics - This chapter discusses: Special estimated tax rules for qualified farmers Estimated tax penalty Useful Items - You may want to see: Publication 505 Tax Withholding and Estimated Tax Form (and Instructions) 1040 U. Filelate S. Filelate Individual Income Tax Return 1040-ES Estimated Tax for Individuals 2210-F Underpayment of Estimated Tax by Farmers and Fishermen See chapter 16 for information about getting publications and forms. Filelate Special Estimated Tax Rules for Qualified Farmers Special rules apply to the payment of estimated tax by individuals who are qualified farmers. Filelate If you are not a qualified farmer as defined next, see Publication 505 for the estimated tax rules that apply. Filelate Qualified Farmer An individual is a qualified farmer for 2013 if at least two-thirds of his or her gross income from all sources for 2012 or 2013 was from farming. Filelate See Gross Income , next, for information on how to figure your gross income from all sources and see Gross Income From Farming , later, for information on how to figure your gross income from farming. Filelate See also Percentage From Farming , later, for information on how to determine the percentage of your gross income from farming. Filelate Gross Income Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from income tax. Filelate On a joint return, you must add your spouse's gross income to your gross income. Filelate To decide whether two-thirds of your gross income was from farming, use as your gross income the total of the following income (not loss) amounts from your tax return. Filelate Wages, salaries, tips, etc. Filelate Taxable interest. Filelate Ordinary dividends. Filelate Taxable refunds, credits, or offsets of state and local income taxes. Filelate Alimony. Filelate Gross business income from Schedule C (Form 1040). Filelate Gross business receipts from Schedule C-EZ (Form 1040). Filelate Capital gains from Schedule D (Form 1040). Filelate Losses are not netted against gains. Filelate Gains on sales of business property. Filelate Taxable IRA distributions, pensions, annuities, and social security benefits. Filelate Gross rental income from Schedule E (Form 1040). Filelate Gross royalty income from Schedule E (Form 1040). Filelate Taxable net income from an estate or trust reported on Schedule E (Form 1040). Filelate Income from a Real Estate Mortgage Investment Conduit reported on Schedule E (Form 1040). Filelate Gross farm rental income from Form 4835. Filelate Gross farm income from Schedule F (Form 1040). Filelate Your distributive share of gross income from a partnership, or limited liability company treated as a partnership, from Schedule K-1 (Form 1065). Filelate Your pro rata share of gross income from an S corporation, from Schedule K-1 (Form 1120S). Filelate Unemployment compensation. Filelate Other income not included with any of the items listed above. Filelate Gross Income From Farming Gross income from farming is income from cultivating the soil or raising agricultural commodities. Filelate It includes the following amounts. Filelate Income from operating a stock, dairy, poultry, bee, fruit, or truck farm. Filelate Income from a plantation, ranch, nursery, range, orchard, or oyster bed. Filelate Crop shares for the use of your land. Filelate Gains from sales of draft, breeding, dairy, or sporting livestock. Filelate Gross income from farming is the total of the following amounts from your tax return. Filelate Gross farm income from Schedule F (Form 1040). Filelate Gross farm rental income from Form 4835. Filelate Gross farm income from Schedule E (Form 1040), Parts II and III. Filelate Gains from the sale of livestock used for draft, breeding, sport, or dairy purposes reported on Form 4797. Filelate For more information about income from farming, see chapter 3. Filelate Farm income does not include any of the following: Wages you receive as a farm employee. Filelate Income you receive from contract grain harvesting and hauling with workers and machines you furnish. Filelate Gains you receive from the sale of farm land and depreciable farm equipment. Filelate Percentage From Farming Figure your gross income from all sources, discussed earlier. Filelate Then figure your gross income from farming, discussed earlier. Filelate Divide your farm gross income by your total gross income to determine the percentage of gross income from farming. Filelate Example 1. Filelate Jane Smith had the following total gross income and farm gross income amounts in 2013. Filelate Gross Income   Total Farm Taxable interest $3,000   Dividends 500   Rental income (Sch E) 41,500   Farm income (Sch F) 75,000 $75,000 Gain (Form 4797) 5,000 5,000 Total $125,000 $80,000 Schedule D showed gain from the sale of dairy cows carried over from Form 4797 ($5,000) in addition to a loss from the sale of corporate stock ($2,000). Filelate However, that loss is not netted against the gain to figure Ms. Filelate Smith's total gross income or her gross farm income. Filelate Her gross farm income is 64% of her total gross income ($80,000 ÷ $125,000 = 0. Filelate 64). Filelate Special Rules for Qualified Farmers The following special estimated tax rules apply if you are a qualified farmer for 2013. Filelate You do not have to pay estimated tax if you file your 2013 tax return and pay all the tax due by March 3, 2014. Filelate You do not have to pay estimated tax if your 2013 income tax withholding (including any amount applied to your 2013 estimated tax from your 2012 return) will be at least 662/3% (. Filelate 6667) of the total tax shown on your 2013 tax return or 100% of the total tax shown on your 2012 return. Filelate If you must pay estimated tax, you are required to make only one estimated tax payment (your required annual payment) by January 15, 2014, using special rules to figure the amount of the payment. Filelate See Required Annual Payment , next, for details. Filelate Figure 15-1 presents an overview of the special estimated tax rules that apply to qualified farmers. Filelate Example 2. Filelate Assume the same fact as in Example 1. Filelate Ms. Filelate Smith's gross farm income is only 64% of her total income. Filelate Therefore, based on her 2013 income, she does not qualify to use the special estimated tax rules for qualified farmers. Filelate However, she does qualify if at least two-thirds of her 2012 gross income was from farming. Filelate Example 3. Filelate Assume the same facts as in Example 1 except that Ms. Filelate Smith's farm income from Schedule F was $90,000 instead of $75,000. Filelate This made her total gross income $140,000 ($3,000 + $500 + $41,500 + $90,000 + $5,000) and her farm gross income $95,000 ($90,000 + $5,000). Filelate She qualifies to use the special estimated tax rules for qualified farmers, since 67. Filelate 9% (at least two-thirds) of her gross income is from farming ($95,000 ÷ $140,000 = . Filelate 679). Filelate Required Annual Payment If you are a qualified farmer and must pay estimated tax for 2013, use the worksheet on Form 1040-ES to figure the amount of your required annual payment. Filelate Apply the following special rules for qualified farmers to the worksheet. Filelate On line 14a, multiply line 13c by 662/3% (. Filelate 6667). Filelate On line 14b, enter 100% of the tax shown on your 2012 tax return regardless of the amount of your adjusted gross income. Filelate For this purpose, the “tax shown on your 2012 tax return” is the amount on line 61 of your 2012 return modified by certain adjustments. Filelate For more information, see chapter 4 of Publication 505. Filelate Estimated Tax Penalty for 2013 If you do not pay all your required estimated tax for 2013 by January 15, 2014, or file your 2013 return and pay any tax due by March 3, 2014, you may owe a penalty. Filelate Use Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, to determine if you owe a penalty. Filelate See the instructions for Form 2210-F. Filelate Figure 15-1. Filelate Estimated Tax for Farmers Please click here for the text description of the image. Filelate Figure 2–A If you receive a penalty notice, do not ignore it, even if you think it is in error. Filelate You may get a penalty notice even though you filed your return on time, attached Form 2210-F, and met the gross-income-from-farming requirement. Filelate If you receive a penalty notice for underpaying estimated tax and you think it is in error, write to the address on the notice and explain why you think the notice is in error. Filelate Include a computation similar to the one in Example 1 (earlier), showing that you met the gross income from farming requirement. Filelate Prev  Up  Next   Home   More Online Publications