Question

Malik is a doctor in the emergency department at Sacramento City Hospital. Malik is unmarried and has an 8-year-old daughter. In 2020, Malik's employer provided Malik with a $5,000 qualified disaster relief payment to help Malik pay for the cost of hiring a nanny when Malik's daughter's school was closed due to the Covid-19 pandemic. Malik still needed to work during this time, so it was necessary for him to secure alternate child care for his daughter. What amount of the $5,000 qualified disaster relief payment will Malik include in his 2020 gross income?

Answer 1

Gross income shall not include any amount received by an individual as a qualified disaster relief payment as per 26 U.S. Code 139 Disaster relief payments. Section 139 permits employers to provide employees with ‘qualified disaster relief payments’ to assist with personal needs arising from a qualified disaster under the Code. As per the latest notifications(FAQ) issued by IRS April 1, 2020, specifically, provide that the CODIV-19 pandemic is considered a qualified disaster for purposes of section 139.

Qualified disaster payments are excluded from the employee’s gross income, and are deductible to employers. Hence Malik who is a doctor in the emergency department at Sacramento City Hospital with 8-year-old daughter need not add any part of the $5,000 qualified disaster relief payment received to help pay the cost of hiring a nanny when Malik's daughter's school was closed due to the Covid-19 pandemic to his gross income in 2020.

Let's see Section 139 in detail

General rule

Gross income shall not include any amount received by an individual as a qualified disaster relief payment.

Qualified disaster relief payment defined for purposes of this section, the term “qualified disaster relief payment” means any amount paid to or for the benefit of an individual—

1.to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,

2.to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster,

3.by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or

4.if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare,

but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.

Qualified disaster defined for purposes of this section, the term “qualified disaster” means

1.a disaster which results from a terroristic or military action (as defined in section 692(c)(2)),

2.a federally declared disaster (as defined by section 165(i)(5)(A)),

3.a disaster which results from an accident involving a common carrier, or from any other event, which is determined by the Secretary to be of a catastrophic nature, or

4.with respect to amounts described in subsection (b)(4), a disaster which is determined by an applicable Federal, State, or local authority (as determined by the Secretary) to warrant assistance from the Federal, State, or local government or agency or instrumentality thereof.

Other general points to be noted :

Qualified disaster relief payments under section 139 are amounts paid to or for the benefit of an individual to reimburse or pay reasonable and necessary (1) personal, family, living or funeral expenses incurred as a result of a qualified disaster; or (2) incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster. These expenses are payable only to the extent not compensated by insurance or otherwise.