Straight from the IRS: Common Questions on Disaster Tax Relief

Dealing with Disasters

In this special IRS webinar, taxpayers had the opportunity to ask direct questions about disaster tax relief and casualty losses. The session was moderated by David Higgins, Stakeholder Liaison, with answers provided by Michael Mudroncik, Senior Tax Analyst with the IRS Stakeholder Liaison Organization.

Key Points - Straight from the IRS: Common Questions on Disaster Tax Relief

• When FEMA declares a disaster and provides individual assistance (or both individual and public assistance), the IRS will generally postpone tax filing and payment deadlines. Updated deadlines are listed in IRS disaster press releases on IRS.gov.

• You may qualify as an affected taxpayer if:

  
  

  • Your main home is in the disaster area.

  • You are the spouse on a joint return with an affected taxpayer.

  • Your business or main place of business is in the disaster area.

  • You are outside the area, but your necessary tax records are inside the disaster area (must call the IRS Disaster Hotline at 866-562-5227).

  
  

• A casualty loss is the smaller of:

  
  

  1. The decrease in the property’s fair market value due to the disaster, or

  2. The property’s adjusted basis (usually what you paid plus improvements),

     minus insurance or other reimbursements.

  
  

• For individual taxpayers (2018–2025):

  
  

  • Only casualty losses from federally declared disasters are deductible.

  • Each loss must be reduced by $100.

  • The total loss is then reduced by 10% of adjusted gross income (AGI).

  
  

• Taxpayers may use appraisals, cost-of-repairs, or IRS safe harbor methods (such as insurance reports or FEMA disaster loan appraisals) to determine the decrease in fair market value.

• Qualified disaster relief payments (for housing, repairs, funeral expenses, etc.) are not taxable.

• Qualified disaster mitigation payments (under the Stafford Act or National Flood Insurance Act) are also not taxable, do not increase property basis, and you cannot deduct expenses they cover.

• Insurance payments for unscheduled personal property contents or temporary living expenses are excluded from income.

• To claim a loss, file Form 4684 (Casualties & Thefts). Additional forms such as Schedule A (Itemized Deductions) may also be required. Keep documentation such as photos, receipts, appraisals, or assessor’s records.

Q&A

Q: Do taxpayers outside the disaster area qualify for §7508A relief?

A: Yes, if their preparer or necessary records are in a covered disaster area and they cannot file/pay. Taxpayer must call IRS Disaster Hotline (866-562-5227) and provide the FEMA disaster number.

Authority: IRC §7508A; Treas. Reg. §301.7508A-1.

Q: Are partners or S corporation shareholders affected if entity records are in the disaster area?

A: Yes. They are treated as affected taxpayers; filing/payment deadlines are postponed.

Authority: Treas. Reg. §301.7508A-1; Rev. Proc. 2018-58.

Q: How is a casualty loss computed?

A: Deductible amount = smaller of:

1. Decline in FMV (before vs. after casualty), or

2. Adjusted basis (usually cost plus improvements).

   Subtract insurance/reimbursements. Then apply $100-per-casualty reduction and 10% AGI limitation (individuals, 2018–2025).

   Authority: IRC §165; Treas. Reg. §1.165-7; Pub. 547.

Q: When can a disaster loss be claimed?

A: Generally in the disaster year. Election under IRC §165(i) allows deduction in the preceding year, but all related losses must be included. Election filed on Form 4684, Sec. D, by 6 months after the unextended due date of the disaster year return.

Authority: IRC §165(i); Treas. Reg. §1.165-11(c).

Q: How do reimbursements affect casualty loss treatment?

A:

• FEMA/state aid for non-property (food, medical) does not reduce the loss.

• Payments replacing destroyed property reduce the loss.

• Later reimbursements: income in year received to extent prior deduction lowered tax liability (tax benefit rule). Excess reimbursement reduces basis; if excess > basis, gain recognized unless excluded/deferred.

  Authority: Pub. 547 (“Insurance and Other Reimbursements”); Pub. 525.

Q: Are Qualified Disaster Mitigation Payments taxable?

A: No. IRC §139 excludes Stafford Act/NFIA hazard mitigation payments from income. No basis increase; no deduction/credit for related expenditures. Exclusion does not apply to sale/disposition proceeds.

Authority: IRC §139.

Q: What does “immediately after” mean for FMV determinations?

A: FMV measured post-casualty damage. Appraisal must reflect only casualty damage, not market decline. Cost-of-repairs method may be used. Delays due to restricted access are included in assessing damage.

Authority: Treas. Reg. §1.165-7; Pub. 547.

Q: Can a taxpayer elect prior-year deduction for only some properties?

A: No. All related disaster losses must be reported in the preceding year return if election is made.

Authority: Treas. Reg. §1.165-11(c).

Q: How do §7508A postponements interact with §6081 extensions?

A: Deadline is the later of (1) the extended due date, or (2) the end of the postponement period.

Authority: IRC §§6081, 7508A.

Always check the latest IRS disaster press releases on IRS.gov/DisasterTaxRelief for updated filing and payment deadlines, since relief dates can vary by disaster.

Straight from the IRS: Common Questions on Disaster Tax Relief

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