Need Relief After a Disaster? No Quick Fixes, But You Have Options
From Carr, Riggs & Ingram
Natural disasters are costly to just about every taxpayer, but individuals are often hit the hardest. Many are faced with the costs of repairing or replacing personal assets, and some even lose their jobs. When infrastructure fails, businesses close and temporarily (or permanently) lay off their workers, and individuals struggle to make ends meet. While there are no quick and easy solutions for financially surviving a natural disaster, there are some short-term financial assistance options that are worth considering.
Most homeowner’s and renter’s insurance policies do not cover natural disasters. “Acts of God,” as the industry calls them, are covered only if you purchase supplemental insurance. Your insurance provider may have taken the liberty to add these riders in your policy so you are protected from the disasters most common in your area, but not all will. Check to be sure. Most major insurance companies have supplemental insurance for flooding, earthquakes, storms, and volcanoes.
Insurance payouts after natural disasters can help you in a financial crunch, but most likely, they will not be paid timely. Although everyday insurance claims are paid out within just a few weeks, natural disasters can extend this timeline by weeks or even months. After major disasters, insurance providers are inundated with claims. For your claims process to go as smoothly as possible, we suggest you do the following:
- Take photographs of the damage.
- Identify all of the damage before you file your claim. Not all damage is evident the first day or two after a disaster.
- File your claim quickly.
- Wait for an inspection before you begin making repairs.
- Keep all receipts.
- Use only preapproved contractors, mechanics, and technicians.
The Federal Emergency Management Agency (FEMA) is an agency of the U.S. Department of Homeland Security that supports individuals who are struggling financially after a natural disaster. FEMA only assists taxpayers when (1) their financial outlays were not covered by private insurance, (2) the disaster was presidentially declared, and (3) the damage was to their primary home (secondary homes and businesses aren’t covered).
To receive FEMA support, you must:
- Ensure a disaster has been declared by Washington.
- Apply for assistance.
- Wait for a home inspection.
- Wait for your check to arrive.
Although the process is simple, FEMA is notorious for long wait times on disaster payouts. To help speed up the process, fill out your application fully, and have all relevant data — insurance policies, receipts, photographs — ready and waiting. Then, follow up with your contact person regularly. As they say, the “squeaky wheel” gets the grease.
The IRS almost always assesses a hefty penalty on taxpayers who withdraw from their retirement plans before they reach the federal retirement age of 59½. Those who do will typically owe taxes on the withdrawal, plus a 10% penalty for withdrawing early. Although we do not recommend pulling from your retirement plan as a first line of defense, a 10% penalty may not be your worst option. Payday loans, which are commonly marketed to people in similar financial crunches, can charge 400% annual interest, and credit cards can charge 25%.
But rather than withdrawing cash from your 401(k), 403(b), or 457(b) after a disaster, consider borrowing from it. The IRS allows you to borrow 50% of your vested balance or $50,000 (whichever is less), tax-free, if you enter a legally binding agreement to pay the money back to your plan. You must repay on an amortization schedule, make payments quarterly (at minimum), and make your account whole again within five years. Your loan will be subject to interest, but by borrowing rather than withdrawing from your plan, you can avoid the 10% penalty.
After hurricanes Harvey, Irma, and Maria crippled our southern border in 2017, the IRS provided additional relief for those affected. Taxpayers who had savings in 401(k)s and similar employer-sponsored plans were able to borrow up to $100,000 from their accounts’ vested balances, penalty-free, and could extend their payback period. Although this relief is no longer available, a similar provision may come around again. The IRS frequently provides disaster relief for taxpayers. The most recent listing of disaster relief options currently available can be found here.
New Legislation on the Horizon
The House and Senate recently released identical bills that, if passed, would give the IRS full authority to postpone tax return deadlines after disaster strikes. Currently, the IRS must wait for an official disaster declaration before taking action. This new law would allow the IRS to respond more quickly to natural disasters. By extending filing and payment deadlines, they can help financially strapped individuals and businesses keep their heads above water.
Your CRI advisors keep on top of new provisions that may be beneficial during or after a disaster. If you have experienced a natural disaster or are concerned about how you would weather a future one, contact a local CRI tax advisor to discuss your disaster plans.