Tax Treatment of "Qualified Disaster Payments"

Individuals and businesses want to help individuals affected by the disasters and may not realize
there are “Qualified Disaster Payments” that allow disaster victims not to include as income
some assistance payments they receive.


The Victims of Terrorism Tax Relief Act of 2001 added Section 139 to the Internal Revenue
Code, excluding from income qualified disaster relief payments to individuals. The various
components of Section 139 are listed below.


Section 139(a) provides gross income does not include amounts received by an individual for a
qualified disaster payment.


Section 139(b) defines “qualified disaster payments” as amounts paid for the benefit of an
individual to:

  1. Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses
    incurred as a result of a disaster
  2. Reimburse or pay reasonable and necessary expenses to repair or rehabilitate a personal
    residence or repair or replacement of contents to the extent that the need for such is due
    to a disaster
  3. Payments by a Federal, State, or local government in connection with a qualified disaster
    in order to promote the general welfare.
    Section 139 (c) defines the term “qualified disaster” as:
  4. A disaster resulting from terrorist or military action
  5. A Federally declared disaster
  6. A disaster resulting from any event the Secretary determines to be of a catastrophic
    nature
  7. A disaster determined by applicable Federal, State, or local authority that warrants
    assistance from Federal, State, or local authority governmental agencies.
    Revenue Ruling 2003-12 (https://www.irs.gov/pub/irs-drop/rr-03-12.pdf) offers guidance
    indicating individuals who are disaster victims will generally not to have to pay income tax on
    assistance payments they receive. The revenue ruling provides taxpayers in a Federally declared
    disaster area who receive grants from state programs, charitable organizations or employers to
    cover medical, transportation, or temporary housing expenses do not include these grants in their
    income.