House Passes Tax Exemption for FEMA Disaster Relief Grants

By John L. Duoba, CCH Financial Planning Toolkit Staff Writer, and Steven Cooper, CCH Washington Staff Writer

Victims of natural disasters who receive funds from the Federal Emergency Management Agency (FEMA), for the purpose of relocating or rebuilding/strengthening homes and businesses against future damages, may no longer have to pay taxes on the relief.

The House of Representatives approved by voice vote on March 14, 2005, a bill that would make FEMA disaster mitigation grants exempt from federal taxation. These hazard mitigation grants are used by state and local governments in conjunction with homeowners to help prevent future damage to property and lives from hurricanes, tornadoes, flooding and other natural disasters.

Supporters of the bill believed the taxation was counterproductive for many reasons. It is a drain on rebuilding efforts by low income people, resulting in incomplete or poorly repaired structures, likely to be damaged again and in need of future relief efforts. Making matters worse, many states follow the federal tax code on what is considered income, resulting in a tag-team tax hit for the recipients. Moreover, depressed property values can make relocation difficult for these property owners with little equity to leverage, and a tax bill that reduces aid compounds this situation.

Currently, any government funds paid to property owners for cleanup after an emergency are already exempt from state and federal taxes. When the Senate follows suit on this bill, as expected, mitigation funds will be as well.

President George W. Bush has already included the cost of the legislation in this year's budget proposal, and the Congressional Budget Office estimates the 10-year cost of the tax cut bill to be $105 million. But bill proponents argue the money will be recouped over time by paying out less in disaster funds in later years, because people will have made changes to their properties to safeguard them or moved to safer areas.

Lawmakers sought the legislation in order to reverse a June 2004 IRS ruling that held that FEMA grants represented taxable income to participating businesses and individuals, said Ways and Means Committee Member Rep. Robert Portman (R-Ohio).

The bill is expected to become law before the April 15 tax filing deadline.

Related items:

Victims of Natural Disasters Can Get Federal Tax Relief, Gov't Aid

Posted March 16, 2005.