Depending on the type of disaster assistance you receive, you may or may not have to claim it on your taxes. Generally speaking, any assistance provided by the government that does not qualify as a loan is tax-free and does not need to be claimed on taxes.
However, if the disaster assistance you received was in the form of a loan, then it may be taxable depending on the terms of the program you’re enrolled in. These types of disaster assistance may still come with some tax benefits, such as deductions or credits, that you can take advantage of when filing your taxes.
Do I need to declare FEMA relief as taxable income?
A FEMA grant— relief from the Federal Emergency Management Agency — is provided as a federal grant to people and businesses in need. It is not reportable income. It is considered tax-exempt assistance. It does not need to be repaid. It will also not impact any other federal entitlement programs you may be receiving.
It is still important to keep records of the assistance you receive from FEMA, as you may need it to claim deductions or credits when filing your taxes. It is always a good idea to consult with an accountant or tax professional for specific guidance and advice regarding your individual situation.
How do I claim disaster relief on my taxes?
When completing your taxes, to notify the IRS about the loss you suffered in a natural disaster, you should complete and submit Form 4684 – Casualties and Thefts. This form is used to claim any losses that were incurred due to a disaster such as theft or damage caused by natural disasters like floods, fires, tornadoes and hurricanes. You’ll be able to calculate any losses that have been covered by insurance or other forms of compensation, such as disaster assistance received from FEMA.
You will need to provide documentation of the disaster relief funds received and how they were used. This can be done by providing documentation such as loan documents, Form 4684 and other applicable records that show how you used the funds. It is important to keep accurate records of all disaster relief funds received in case you are audited by the IRS.
In some states like California, you will need to add a statement of loss on your tax return if you have suffered a casualty loss related to the disaster. You can do this by completing Form 4684 and itemizing any losses that were associated with the disaster.
Are disaster assistance grants taxable income?
No, grants from FEMA and other federal agencies are not taxable income.
Tax responsibilities with Disaster Relief
It is important to do your research and consult with a tax professional if needed when filing taxes after receiving disaster relief so that you do not miss out on any potential benefits or end up facing serious penalties for misrepresenting information.
Is Economic Disaster Injury Loan Taxable?
No, Economic Disaster Injury Loans that are funded by FEMA for small businesses caught up in disasters are not taxable because these are loans and have a repayment requirement. Unlike the PPP, the Economic Disaster Injury Loan cannot be forgiven and must be repaid. Consequently, they do not need to be reported on your taxes.
EIDL loans have an interest rate of 3.75% (2.75% for non-profits) and do not need to be paid back until after the business ceases operations or up to 30 years from origination. They do not require collateral and do not have any fees associated with them, making them an attractive option for businesses struggling financially due to a disaster.
Is an EIDL Advance Taxable?
No, as of December 2020, as part of the pandemic relief package, advances on Economic Disaster Injury Loans are also not taxable and do not need to be reported as taxable income. It is important to note that if you do not use the funds for the specified approved purposes, they may be considered taxable income.
Advances in the amount of up to $10,000 do not have to be repaid and do not need to be reported as taxable income. It is important to keep accurate records of the funds received and how they were used in case you are audited by the IRS.
How do I account for EIDL on my taxes?
EIDL funds do not need to be reported on your taxes. However, you will still need to provide proof of the loan when filing your tax return. This can be done by providing documentation such as loan documents, Form 4684 and other applicable records that show how you used the funds.
Can an Economic Injury Disaster Loan be Forgiven?
No, unlike the PPP, an EIDL cannot be forgiven and must be repaid. If you do not repay the loan, it will be reported to the IRS as taxable income. The EIDL advance grant of up to $10,000, however, does not need to be repaid and is not taxable.
Reasons FEMA will deny eligibility for disaster assistance
Your application for disaster assistance can result in a denial from FEMA for a number of reasons. We’ll outline a few here:
Criteria Not Met
FEMA may deny eligibility for disaster assistance if the applicant simply does not meet all of the criteria. Some of the reasons that FEMA may deny eligibility include not having a valid Social Security Number or failing to report any changes in income or household size since registering for assistance.
Ineligible location
FEMA may determine that the property is not in an eligible area, such as a declared disaster zone.
Insufficient Damage
FEMA may determine that the damage is not severe enough to meet the criteria of a disaster declaration. Despite the possibility of denial, it is still important to apply for FEMA aid if you feel you qualify and meet all requirements.
Insufficient documentation
FEMA requires certain documents from applicants, such as proof of ownership or occupancy. If the applicant cannot provide the required paperwork this may result in a denial of assistance.
Insurance Coverage
The claimant has sufficient insurance coverage to cover their losses. If your insurance coverage falls short or denies coverage, then you may still be eligible for FEMA assistance.
Duplication of Benefits
The applicant has received assistance from another source (another agency or their private insurance company) for the same losses which would be duplicative if FEMA were to assist. By law, FEMA cannot assist with losses that have already been covered.
Ineligible Losses
The damage is not eligible for the program or does not meet the criteria of a disaster-related loss. FEMA does not cover spoiled food, furniture, and other items that are not essential for the health, safety and well-being of the applicant or their family.
Incomplete Application
The applicant has not provided all of the necessary documents or information required by FEMA to complete the application. It is important to provide as much detailed information as possible to be approved for assistance.
Identify Verification
At the time of the application, FEMA will conduct an identity verification process to ensure that the applicant is eligible and has not received assistance from another source. FEMA will try to verify your identity by questions designed to match information that is in your credit file or public records. If the information does not match up, this may result in a denial of assistance.
Fraud
Of course, if you are caught providing misleading information or lying on your application, then FEMA will deny eligibility for disaster assistance. Anyone who puts misleading information on their application, or who has falsified documents to receive assistance can face serious penalties; they would be committing FEMA fraud.
The consequences for FEMA fraud can be severe, including up to 30 years in prison and $250,000 fines. It is important to be honest and provide accurate information when applying for any type of disaster relief.
How much is the disaster allowance?
The amount of the disaster allowance varies depending on the type of assistance you receive and the situation. Generally speaking, loans may have a certain amount that must be paid back over time, while tax-free assistance will depend on your financial situation and any other factors associated with the disaster.
Conclusion
Depending on the type of disaster assistance you receive, you may or may not have to claim it on your taxes. Generally speaking, any assistance provided by the government that does not qualify as a loan is tax-free and does not need to be claimed on taxes, but check on the specific requirements of the program you are enrolled in.
It is important to make sure that you are accurately reporting any type of aid that you receive on your taxes so that you do not run into any issues with the IRS. Always consult with a tax professional to make sure that you understand your responsibilities and do not miss out on any potential benefits or deductions.
When trying to find disaster relief funds, you may not even be aware of all the programs you qualify for, and navigating the complex application process for so many agencies can be daunting and stressful!
American Financial Tax’s team of disaster relief specialists can help you identify grants and loans that fit your needs, navigate the application process, and ensure you do everything correctly when it comes to taxes. Reach out to us today for a free consultation.
