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April 2024

Tax Relief In Disaster Situations For IRAs

Many disaster areas which have been declared by FEMA in 2024. The IRS and the tax code grants tax relief to individuals and businesses in a disaster area in four basic ways. FEMA is the acronym for the Federal Emergency Management Agency.

First, the taxpayer is given an extended time to complete a tax transaction. For example, certain residents of Maine now have a tax filing deadline of either June 17, 2024 or July 15, 2024 rather than April 15, 2024. This means that certain residents of Maine may make their 2023 IRA contribution by July 15, 2024 rather than April 15, 2024. Another example, a taxpayer who withdraws IRA funds on January 17, 2024 normally must complete her rollover within 60 days. She is now allowed to complete her rollover by July 15, 2024.

A person or business could establish and fund a SEP-IRA plan for 2023 even though the individual or the business did not have a tax extension.

You will note on page 8 that there is a separate deadline defined by the IRS for each disaster. These deadline extensions are to June 17, July 15, August 7, and October 7 for those impacted by the terrorist attacks in Israel.

The taxpayer is able to complete his or her tax return and be able to claim the associated tax benefits because the contributions are defined to be timely. The taxpayer will want to attach a note of explanation to their tax return because there is a long time lag when the Form 5498 is furnished to the IRS.

The IRA custodian/trustee is to properly report these “late” contributions to the IRS and to your customer, the taxpayer. A “late” annual contribution is a postponed contribution. A “late” rollover contribution is to be processed using the late rollover certification procedures.

The second tax benefit is, a person who withdraws funds from their IRA does not owe the 10% additional tax if she or he is under age 59 1/2.

The third tax benefit is, a person is able to have their distribution taxed over a three year time period rather than just the one year. The law was changed By SECURE Act 2.0 in that such a distribution is now limited to $22,000 rather than $100,000.

The fourth tax benefit is, a person has three years in which to repay their distribution rather than the normal 60 day rule. In addition, the once per year rollover rule does not apply to a disaster distribution.

Note that when the IRS announces these extended filing deadlines that a taxpayer still has the right to request an extension to file their tax return but such an extension does delay having to pay the tax which is owing.