Because of its catastrophic nature, the earthquake and tsunami that hit Japan last month is a qualified disaster for purposes of the federal tax law, according to the IRS. Similar determinations have been made regarding prior international disasters, such as the Haitian earthquake in 2010 and the Indian Ocean tsunami in 2004.
New guidance issued by the IRS allows recipients of qualified disaster relief payments to exclude those payments from income on their tax returns. It also allows employer-sponsored private foundations to assist employee victims without affecting their tax-exempt status.
A private foundation that is employer-sponsored may make qualified disaster relief payments to employees affected by a qualified disaster. These payments generally include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents that were not covered by insurance. These payments are not included in the individual recipient’s gross income.
The IRS will presume that qualified disaster relief payments made by an employer-sponsored private foundation to employees and their family members in areas affected by the earthquake and tsunami in Japan are consistent with the foundation’s charitable purposes. See more details in Notice 2011-32.
Individuals interested in contributing to victims of the Japan earthquake and tsunami must still take steps to assure their contributions will be tax-deductible.
To qualify for a charitable deduction, contributions must be made to a qualified tax-exempt U.S. charitable organization. Contributions to foreign charities and amounts given as direct aid to affected persons generally do not qualify for the deduction. Also, you will only receive a tax benefit if you itemize your deductions.
Domestic organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has control and discretion over the use of funds. You can check Publication 78, available on the IRS website (www.irs.gov), to see if the charity you intend to support has received IRS qualification. Churches or governmental organizations may be qualified to accept charitable contributions, even though they are not listed in Publication 78.