Financial Relief Options for Victims of the California Wildfires

Recovering from the devastating California wildfires can be overwhelming, especially when financial hardship adds to the burden. Beyond insurance and FEMA assistance, there are various tax-related strategies that can help provide relief. This blog explores the options and resources available to help wildfire victims regain stability.

Special Rules for IRA Distributions in Disaster Situations

Under the rules of the Internal Revenue Code, disaster-related distributions are sometimes treated differently from standard early withdrawals. For federally declared disasters, Congress may pass legislation that allows penalty-free distributions from IRAs and other retirement accounts. While you would still owe income tax on the distribution, the additional 10% penalty for withdrawing funds before age 59½ can be waived. Consult with your financial advisor to see if your plan allows you to withdraw from your IRA penalty-free.

If you determine that an IRA distribution is your best option, follow these steps:

Confirm Eligibility: Verify that your disaster qualifies under IRS rules and that penalty-free distributions are available.

Consult a Tax Professional: An enrolled agent or tax advisor can help you understand the tax implications and ensure compliance.

Plan for Taxes: Set aside funds to cover the tax liability or consider spreading the tax burden over three years if allowed (currently the IRS has not given guidance over this)

Explore Repayment Options: If possible, plan to repay the distribution within the allowed timeframe to restore your retirement savings.

The SECURE 2.0 Act of 2022 further expands options for retirement account holders in disaster situations. Key provisions include:

1. Penalty-Free Withdrawals: Up to $22,000 can be withdrawn penalty-free for those impacted by a federally declared disaster. Taxes on this distribution can be spread over three years, easing the immediate financial burden.

   
   

2. Flexible Repayment Options: Individuals have three years to repay the withdrawn amount to their retirement account without incurring penalties or permanent tax liabilities.

   
   

3. Enhanced Loan Provisions: For those with employer-sponsored retirement plans like 401(k)s, loan limits have been increased to $100,000 or 100% of the vested account balance, whichever is less.

These changes under the SECURE 2.0 Act provide greater flexibility for those affected by disasters, allowing them to access necessary funds while preserving their long-term financial security. Consult your plan's financial advisor on what options you have.

Section 139 Qualified Disaster Relief Payments

Section 139 of the Internal Revenue Code allows employers to provide tax-free financial assistance to employees impacted by a federally declared disaster. These payments can be used for reasonable and necessary expenses such as housing repairs, temporary lodging, medical expenses, and transportation costs.

The key benefits of Section 139 payments include:

Tax-Free Assistance: Recipients do not need to include these payments as taxable income, and employers can deduct them as business expenses.

No Repayment Required: Unlike loans, these payments do not need to be repaid by the employee.

For employers, offering Section 139 disaster relief payments can be a powerful way to support your workforce while also benefiting your business. Providing this type of financial assistance fosters goodwill, improves employee morale, and helps your team recover more quickly from disasters. Additionally, these payments are fully deductible as a business expense, making them a cost-effective way to give back to your employees in their time of need.

Employers looking to implement Section 139 disaster relief plans should ensure they document the plan properly, specifying eligible expenses and maintaining records to substantiate payments.

Wildfire recovery is a long and challenging process, but there are financial relief options available to ease the burden. From penalty-free IRA distributions to Section 139 disaster relief payments, understanding your options can help you make informed decisions during this difficult time. Employers can also play a vital role in supporting their employees through Section 139 plans, providing critical financial assistance while enjoying tax benefits. If you’re unsure about the best course of action, consulting a tax professional your financial advisor and can help you navigate these options and align them with your financial goals. For personalized guidance, reach out to us at info@mkhstaxgroup.com.