Catastrophe savings accounts could help AL, MS & SC homeowners weather hurricane damages & save taxes
Tropical Storm Storm Cindy is now officially churning in the Gulf of Mexico, with a predicted landfall in a few days along the Texas-Louisiana border.
That track could, of course change. And as meteorologists on the Weather Channel note, "it's not the name, but the rain." Tropical system precipitation typically reaches beyond the actual low pressure system, often well inland of coastal properties, and produces dangerous flooding.
Such reports have come in from as far north as Atlanta today, with Cindy's expanded rain bands causing highway flooding in that city.
Federal and state tax help for recovery efforts: As noted in earlier weather and tax-related posts, all of which are collected on the ol' blog's Natural Disasters special web page, you might be able to claim storm losses on your tax return as a casualty loss.
If the system is deemed a major disaster, you have tax time-shifting options that could let you amend a return and get tax relief help to put toward recovery efforts sooner.
Alabama, Mississippi and South Carolina also offer tax help for storm victims via Catastrophe Savings Accounts, or CSAs. By contributing to these special accounts, a CSA owner can build a disaster fund and then use the money tax-free to pay certain eligible disaster expenses.
In some cases, the contributions also provide a tax deduction.
Some shared CSA attributes: In each state, the accounts must be specifically opened and designated to pay for catastrophe repairs and recovery. This means damages from windstorms, cyclones, earthquakes, hurricanes, ice storms, tornadoes, high winds, flood and hail, regardless of whether a disaster is declared a major one by Federal Emergency Management Agency (FEMA).
The CSA must be tied to the account owner's primary residence, not any additional homes, such as a beach vacation property. And only one account per home can be opened even if it is jointly owned by spouses.
If you contribute too much or use the funds for things other than eligible disaster expenses on your primary home, you'll owe tax on the money and could face an added penalty.
The amounts that can be contributed and/or deducted are related to the residence's hazard insurance policy deductible amount.
Here's a quick look at the highlights of each of these state CSAs.
Alabama: Residents of the Yellowhammer State can open a regular savings or money market account and deem it a catastrophe savings account. Such a designation means that the contributed money and its earnings must go to cover repair costs and losses from damage to the account owner's principal residence.
The interest earned on the CSA is tax-free as long as the account owner doesn't exceed the maximum contribution levels. Residents can even claim a personal income tax deduction for CSA contributions, subject to a cap based on their homeowner's hazard policy's deductible amount.
Basically, you can claim a deduction of up to $2,000 if your homeowner's deductible is $1,000 or less, up to $15,000 if your home insurance policy deductible is more than $1,000 or up to the lesser amount of $250,000 or the value of your home if you self-insure.
You can find more information on the Alabama CSA is available at the state tax department's special CSA FAQ web page. You also can check out the instructions for CSA claims in the Alabama tax return (Form 40) instruction booklet.
Mississippi: In the Magnolia State, homeowners can put up to $2,000 in a CSA if their home's insurance deductible is less than or equal to $1,000.
If the insurance deductible is greater than $1,000, then the total amount that may be contributed to a Mississippi CSA is $15,000 or twice the amount of the deductible, whichever is less.
And in cases where a homeowner decides not to get insurance on his or her legal residence, then the total amount that may be contributed to a CSA is the lesser of $350,000 or the value of the taxpayer's legal residence.
CSA money also can be used to pay your insurance deductible on your Mississippi legal residence as long as that policy covers hurricane, flood, windstorm or other "Catastrophic Event" damage
Mississippians can contribute to their CSAs over multiple years until the maximum limitation amount has been met.
And a tax deduction can be claimed against Mississippi state income.
South Carolina: Money in a Palmetto State CSA can help account owners pay their home insurance policy's deductible, as well as cover out-of-pocket costs related to a disaster. Those funds can be used to pay for qualified catastrophe expenses that result from a hurricane, flood, or windstorm event that has been declared an emergency by the governor.
The money contributed to a South Carolina CSA and the annual interest it earns are not subject to state income taxes if left in the account or used for qualified catastrophe expenses.
As with the other states, S.C. CSA contribution limits depend on your insurance deductible:
- If your policy's deductible is less than or equal to $1,000 you can contribute up to $2,000;
- If your deductible is more than $1,000 you can contribute the lesser of $15,000 or twice the deductible amount; and
- If you self-insure, you can contribute up to a maximum of $250,000, but amount may not exceed the value of your home.
The entire amount does not have to be contributed in one year, but total contributions for all years cannot exceed the maximum.
Any interest earned in a South Carolina CSA is exempt from state income tax.
The account holder, not the bank, must maintain documentation for income tax deductions and to verify that CSA withdrawals were used exclusively for qualified catastrophe expenses.
As with all things tax, whether federal or state, make sure that a CSA is an appropriate and cost- and tax-effective move for your personal financial situation. If you have questions or concerns, talk with a local a tax pro about the possible tax benefits or problems you could encounter with a CSA.