Midwestern Disaster Areas

A Midwestern disaster area is an area for which a major disaster was declared by the President during the period beginning on May 20, 2008, and ending on July 31, 2008, in the state of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, or Wisconsin, as a result of severe storms, tornadoes, or flooding that occurred on the applicable disaster date. See Tables 1 and 2 for a list of the counties included in the Midwestern disaster areas.

Applicable Disaster Date

The term "applicable disaster date" as used in this publication, refers to the date on which the severe storms, tornadoes, or flooding occurred in the Midwestern disaster areas. You will need to know this date when using this publication for the various tax provisions.

Temporary Suspension of Limits on Charitable Contributions

This benefit applies only to the counties in Table 1.

Standard Mileage Rate for Charitable Use of Vehicles

This benefit applies only to the counties in Table 1.
 

The following are special standard mileage rates in effect for 2008 for the cost of operating your vehicle for providing charitable services related only to the severe storms, tornadoes, or flooding.

Mileage Reimbursements to Charitable Volunteers

This benefit applies only to the counties in Table 1.
 

You can exclude from income amounts you receive as mileage reimbursements for the use of a private passenger vehicle for the benefit of a qualified charitable organization in providing relief related to the severe storms, tornadoes, or flooding during the period beginning on the applicable disaster date, and ending on December 31, 2008. You cannot claim a deduction or credit for amounts you exclude. You must keep records of miles driven, time, place (or use), and purpose of the mileage. The amount you can exclude cannot exceed the standard business mileage rate (shown below) for expenses incurred during the following periods.

Definitions

Taxation of Qualified Disaster Recovery Assistance Distributions

This benefit applies to the counties in both Tables 1 and 2.

Qualified disaster recovery assistance distributions are included in income in equal amounts over three years. However, if you elect, you can include the entire distribution in your income in the year it was received.

Qualified disaster recovery assistance distributions are not subject to the additional 10% tax (or the additional 25% tax for certain distributions from SIMPLE IRAs) on early distributions from qualified retirement plans (including IRAs). However, any distributions you receive in excess of the $100,000 qualified disaster recovery assistance distribution limit may be subject to the additional tax on early distributions.

For more information, see Form 8930.

Repayment of Qualified Disaster Recovery Assistance Distributions

This benefit applies to the counties in both Tables 1 and 2.

If you choose, you generally can repay any portion of a qualified disaster recovery assistance distribution that is eligible for tax-free rollover treatment to an eligible retirement plan. Also, you can repay a qualified disaster recovery assistance distribution made on account of a hardship from a retirement plan. However, see Exceptions later for qualified disaster recovery assistance distributions you cannot repay.

You have three years from the day after the date you received the distribution to make a repayment. Amounts that are repaid are treated as a qualified rollover and are not included in income. Also, a repayment of a qualified disaster recovery assistance distribution to an IRA is not counted when figuring the one-rollover-per-year limitation. See Form 8930 for more information on how to report repayments.

Repayment of Qualified Distributions for the Purchase or Construction of a Main Home

This benefit applies to the counties in both Tables 1 and 2.

If you received a qualified distribution to purchase or construct a main home in a Midwestern disaster area, you can repay part or all of that distribution on or after the applicable disaster date, but no later than March 3, 2009, to an eligible retirement plan. For this purpose, an eligible retirement plan is any plan, annuity, or IRA to which a qualified rollover can be made.

To be a qualified distribution, the distribution must meet all of the following requirements.

Amounts that are repaid before March 4, 2009, are treated as a qualified rollover and are not included in income. Also, a repayment of a qualified distribution to an IRA is not counted when figuring the one-rollover-per-year limitation.

A qualified distribution not repaid before March 4, 2009, may be taxable for 2007 or 2008 and subject to the additional 10% tax (or the additional 25% tax for certain SIMPLE IRAs) on early distributions.

You must file Form 8930 if you received a qualified distribution that you repaid, in whole or in part, before March 4, 2009.

Loans From Qualified Plans

This benefit applies to the counties in both Tables 1 and 2.

The following benefits are available to qualified individuals.

Earned Income Credit and Child Tax Credit

This benefit applies to the counties in both Tables 1 and 2.
 

You can elect to use your 2007 earned income to figure your earned income credit (EIC) and additional child tax credit for 2008 if:

Additional Exemption for Housing Individuals Displaced by the Severe Storms, Tornadoes, or Flooding

This benefit applies to the counties in both Tables 1 and 2.
 

You can claim an additional exemption amount of $500 for providing housing in your main home for each individual displaced by the severe storms, tornadoes, or flooding. The additional exemption amount is claimed on Form 8914. You can claim an additional exemption amount only one time for a specific individual. If you claimed an additional exemption amount for an individual in 2008, you cannot claim that amount again for the same individual in 2009.

The maximum additional exemption amount you can claim for all displaced individuals is $2,000. Any additional exemption amount you claimed for displaced individuals in 2008 will reduce the $2,000 maximum for 2009. The $2,000 limit applies to a husband and wife, whether the husband and wife file joint returns or separate returns. If married filing separately, the $2,000 can be divided in $500 increments between the spouses. For example, if one spouse claims an additional exemption amount for one displaced individual, the other spouse, if otherwise eligible, can claim additional exemption amounts for three different displaced individuals.

If two or more taxpayers share the same main home, only one taxpayer in that main home can claim the additional exemption amount for a specific displaced individual. In order for you to be considered to have provided housing, you must have a legal interest in the main home (that is, own or rent the home).

To qualify as a displaced individual, the individual:

You cannot claim the additional exemption amount if you received rent (or any other amount) from any source for providing the housing. You are permitted to receive payments or reimbursements that do not relate to normal housing costs, including the following.

However, you cannot claim the additional exemption amount if you received any reimbursement for the extra costs of heat, electricity, or water used by the displaced individual.

Also, you must report on Form 8914 the displaced individual's social security number or individual taxpayer identification number to claim an additional exemption amount.

For more information, see Form 8914.

Education Credits

This benefit applies only to the counties in Table 1.
 

The education credits have been expanded for students attending an eligible educational institution located in a Midwestern disaster area (Midwestern disaster area students) for any tax year beginning in 2008 or 2009. The Hope credit for a Midwestern disaster area student is increased to 100% of the first $2,400 in qualified education expenses and 50% of the next $2,400 of qualified education expenses for a maximum credit of $3,600 per student. The lifetime learning credit rate for a Midwestern disaster area student is increased from 20% to 40%.

The definition of qualified education expenses for a Midwestern disaster area student also has been expanded. This expanded definition also applies to the tuition and fees deduction claimed on Form 8917. In addition to tuition and fees required for the student's enrollment or attendance at an eligible educational institution, qualified education expenses for a Midwestern disaster area student include the following.

You will need to contact the eligible educational institution for qualified room and board costs.

For more information, see Form 8863. See Form 8917 for the tuition and fees deduction.

Recapture of Federal Mortgage Subsidy

This benefit applies only to the counties in Table 1.
 

Generally, if you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. However, you do not have to recapture any benefit if your mortgage loan was a qualified home improvement loan of not more than $15,000. This amount is increased to $150,000 if the loan was provided before 2011 and was used to alter, repair, or improve an existing owner-occupied residence in a Midwestern disaster area as shown in Table 1.

Exclusion of Certain Cancellations of Indebtedness by Reason of the Severe Storms, Tornadoes, or Flooding

This benefit applies to the counties in both Tables 1 and 2.
 

Generally, discharges of nonbusiness debts (such as mortgages) made on or after the applicable disaster date and before January 1, 2010, are excluded from income for individuals whose main home was in a Midwestern disaster area on the applicable disaster date. If the individual's main home was located in a Midwestern disaster area as shown in Table 2, the individual also must have had an economic loss because of the severe storms, tornadoes, or flooding. Examples of an economic loss include, but are not limited to:

This relief does not apply to any debt secured by real property located outside a Midwestern disaster area.

You may also have to reduce certain tax attributes by the amount excluded. For more information, see Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Tax Relief for Temporary Relocation

This benefit applies only to the counties in Table 1.
 

The IRS can adjust the internal revenue laws to ensure that taxpayers do not lose a deduction or credit or experience a change of filing status in 2008 or 2009 as a result of a temporary relocation caused by the severe storms, tornadoes, or flooding. However, any such adjustment must ensure that an individual is not taken into account by more than one taxpayer for the same tax benefit. The IRS has exercised this authority as follows.

Employee Retention Credit

This benefit applies only to the counties in Table 1.
 

An eligible employer who conducted an active trade or business in a Midwestern disaster area can claim the employee retention credit. The credit is 40% of qualified wages for each eligible employee (up to a maximum of $6,000 in qualified wages per employee). Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). Use Form 5884-A to claim the credit.

Employer Housing Credit and Exclusion

This benefit applies only to the counties in Table 1.
 

An employer who conducted an active trade or business in a Midwestern disaster area can claim the employer housing credit. The credit is equal to 30% of the value (up to $600 per month per employee) of in-kind lodging furnished to a qualified employee (and the employee's spouse or dependents) from November 1, 2008, through May 1, 2009. The value of the lodging is excluded from the income of the qualified employee but is treated as wages for purposes of taxes imposed under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). The employer must use Form 5884-A to claim the credit.

A qualified employee is an individual who had a main home in a Midwestern disaster area on the applicable disaster date, and who performs substantially all employment services in a Midwestern disaster area for the employer furnishing the lodging. The employee cannot be your dependent or a related individual. See section 51(i)(1).

For more information, see Form 5884-A.

Demolition and Clean-up Costs

This benefit applies only to the counties in Table 1.
 

You can elect to deduct 50% of any qualified disaster recovery assistance clean-up costs for the tax year in which the costs are paid or incurred, instead of capitalizing them. Qualified disaster recovery assistance clean-up costs are any amounts paid or incurred on or after the applicable disaster date, and before January 1, 2011, for the removal of debris from, or the demolition of structures on, real property located in a Midwestern disaster area that is:

Qualified disaster recovery assistance clean-up costs are limited to amounts necessary due to damage attributable to the severe storms, tornadoes, or flooding in the Midwestern disaster areas.

Increase in Rehabilitation Tax Credit

This benefit applies only to the counties in Table 1.
 

The rehabilitation credit is increased for qualified rehabilitation expenditures paid or incurred on or after the applicable disaster date, and before January 1, 2012, on buildings located in a Midwestern disaster area as follows.

For more information, see Form 3468, Investment Credit.