Hurricane Issac and IRAs
By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott
Hurricane Isaac, which began on August 26, 2012, did considerable flooding and wind damage to parts of the U.S., especially Louisiana and Mississippi. Some areas in those states were declared federal disaster areas by the Federal Emergency Management Agency (FEMA).
The IRS can postpone certain tax deadlines for individuals affected by federally declared disaster areas. These postponed deadlines can also apply to IRAs. For example, the relief includes more time to complete certain acts such as IRA rollovers or recharacterizations, correction of certain excesses, and extending tax filing deadlines such as the deadline for filing individual income tax returns and making IRA contributions.
When a deadline is postponed, the IRS issues a news release or other information in the Internal Revenue Bulletin and on its website. For example, IRS News Release 2012-70 alerts certain victims of Hurricane Isaac that they may be eligible for some relief.
The authority to extend tax deadlines, however, does not grant IRS unlimited power. For instance, it cannot exempt early IRA distributions from the 10% penalty. Such a change would require a change in the law and can only be made by Congress, which has previously passed laws that provide special tax breaks due to natural disasters. These laws were known as “qualified hurricane distributions” and “qualified disaster recovery distributions.”
Qualified hurricane distributions were distributions from an IRA during specific dates after three specific hurricanes, Katrina, Rita, and Wilma. For example, a qualified hurricane distribution was permitted for Hurricane Katrina that devastated New Orleans in August 2005. IRA distributions taken by affected taxpayers were exempt from the 10% early distribution penalty, taxed over a three-year period, and repayments were allowed within three years. In order to qualify for these special breaks, the individual must have suffered an economic loss as a result of the hurricane.
The special tax treatments previously given to qualified hurricane distributions were extended to the Kansas Disaster Area of 2007 and the Midwestern Disaster Area of 2008. Those distributions were known as “qualified disaster recovery assistance distributions.”
Don’t assume that if you suffered an economic loss as a result of Hurricane Isaac that you will automatically qualify for the special tax breaks. Congress has not passed a law declaring distributions “qualified hurricane distributions” or “qualified disaster recovery distributions” as a result of Hurricane Issac.