Tax Relief for Terrorism Victims

TAX BRIEF

President Bush signed HR 2884, Victims of Terrorism Tax Relief Act of 2001, into law on January 23, 2002. The act provides tax relief for victims of the September 11 terrorist attacks, the Oklahoma City bombing and the anthrax letters by excluding from taxable income certain death benefits, payments from charitable organizations, forgiveness of debt and qualified disaster relief payments these victims receive.

The act defines “specified terrorist victim” as “any decedent…who dies as a result of wounds or injury as a result of terrorist attacks against the United States on April 19, 1995, or September 11, 2001, or…who dies as a result of illness incurred as a result of an attack involving anthrax occurring on or after September 11, 2001, and before January 1, 2002.” The act notes that no individual the U.S. attorney general identifies as having been either a participant or conspirator in terrorist attacks or a representative of such a person would be considered a terrorist victim.

Section 101 of the act exempts such victims from income tax for the year of death and for the prior year. The minimum benefit for each eligible individual is $10,000. The exclusion, however, does not apply to deferred compensation that would have been payable after death had the taxpayer not been a terrorist victim or to amounts payable in the taxable year that would not have been payable but for an action taken after September 11, 2001. For purposes of this exemption, victims or their families are permitted to file amended returns for a minimum of one year after the president signs the bill. This provision will allow survivors of Oklahoma City bombing victims to file for tax relief even though the normal statutory period for amended returns has passed.

The receipt of employer-provided death benefits normally is a taxable event; however, section 102 of the act excludes certain death benefits from income. It says gross income will not include amounts an employer pays by reason of the death of an employee who is specified as a terrorist victim.

Section 103 sets special lower estate tax rates both for victims of included terrorist acts and for combat-zone-related deaths of members of the armed forces. The rates range from 1% on the first $50,000 by which the taxable estate exceeds $100,000 to a marginal rate of 20% of the excess of the estate over $10,100,000. This is a substantial reduction in the unified transfer tax rates applicable for 2001 which range from 18% on the first $10,000 by which a taxable estate exceeds $10,000 to a marginal rate of 55% on estates over $3,000,000.

Under section 104, payments a 501(c)(3) charitable organization makes due to the injury, death, wounding or illness of September 11 attack victims will also be tax-exempt. This applies to payments made on or after September 11, 2001. The exemption extends to victims of anthrax attacks occurring on or after September 11, 2001, and before January 1, 2002. To qualify, payments must be made in good faith using a reasonable and objective formula that is consistently applied. Payments by a private foundation are also excludable.

Normally, the forgiveness of debt by a creditor would be a taxable transaction. However, section 105 of the act excludes from gross income debt forgiveness by reason of the death of an individual as a result of the September 11 terrorist attacks or as a result of illness due to the anthrax attacks. Only debt discharges on or after September 11, 2001, and before January 1, 2002, qualify for the exemption.

Observation. This legislation provides substantial tax relief for terrorist victims. CPAs should be aware of these provisions to ensure that any client who qualifies for this relief receives the full benefit of the act. Although tax years 1994 and 1995 are closed, this legislation reopens those years for survivors of Oklahoma City bombing victims.

—Rebecca Carr, CPA, instructor in accounting, and Tina Quinn, CPA, PhD, associate professor of accounting, Arkansas State University.