On April 5, 2011, the Internal Revenue Service (IRS) issued Notice 2011-32 designating the Japan earthquake and tsunami as a qualified disaster for purposes of Internal Revenue Code (IRC) Section 139. This allows recipients to exclude qualified disaster relief payments from taxable income.
The Victims of Terrorism Relief Act of 2001 added IRC Section 139 effective for taxable years ending on or after September 11, 2001. Section 139 provides that qualifying disaster payments from any source, including employer reimbursements for costs incurred in connection with qualified disasters, are not taxable as income and are not subject to employment taxes or withholdings.
Qualified disaster relief payments include payments received from any source for:
- Reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster;
- Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a qualified disaster (includes rental property), and;
- Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a qualified disaster.
Qualified disaster relief payments do not include:
- Payments for expenses otherwise paid for by insurance, or
- Income replacement payments, such as lost wages.
Also under Notice 2011-32, employer sponsored private foundations may choose to provide disaster relief to employee victims of the Japan earthquake. These foundations should exercise due diligence when providing disaster relief to make sure that all requirements are satisfied.
For more information, see IRS Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.