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Catastrophe Savings Accounts

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Why you can trust Insurify

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T.S. Strickland

By: T.S. Strickland

Edited by John Leach

Updated September 13, 2022

Reading time: 5 minutes

Preparation Pays. Weather hurricane season and lower your income taxes with a catastrophe savings account.

This has been a bleak year by any measure: pandemic, political upheaval, “murder hornets.” If you’re like us, you were probably hoping that fall would bring some reprieve from the madness, which is why it was doubly upsetting when the National Oceanic and Atmospheric Administration released the most recent hurricane outlook for the 2021 season. It was, in a word, apocalyptic.

NOAA has predicted one of the most active seasons ever: 19–25 named storms, of which seven to 11 are likely to become hurricanes and three to six will probably evolve into major disasters. If you’re reading this hoping that NOAA’s scientists just got it wrong, don’t hold your breath. The 2020 season proved extremely active.

We’d forgive you if you found yourself stuffing mayonnaise jars with $100 bills and burying them in the backyard to prepare for the coming deluge. That said, we have a better suggestion: if you live in Alabama, Mississippi, or South Carolina, you can put your $100 bills in a Catastrophe Savings Account instead. You won’t have to pay state income tax on the money in your account, and you won’t have to worry about those mayonnaise jars floating away with the rising floodwaters, either. Find Affordable Home Insurance with Insurify.

Catastrophe Savings Account 101

If you live on the coast, you know that homeowners insurance is the best tool available to protect your home and family from hurricanes and other catastrophic events. Online tools like Insurify make it easy to compare quotes from dozens of home insurance companies with just a few clicks and to identify the best and cheapest coverage available.

Even the best home insurance policy won’t cover all your expenses, though. You’ll still have to pay out of pocket for your insurance deductible, and depending on your policy, this amount can be sizable. If you really want to be prepared, you also need to set aside a nest egg large enough to cover these costs.

Fortunately, some states have made it easy for residents to save—by opening a Catastrophe Savings Account (or CSA). CSA owners can contribute to these accounts to build a disaster fund and then use the money tax-free to pay for qualified catastrophe expenses. In some cases, states will even allow account holders to claim an income tax deduction for the contributions.

Currently, only three states (Alabama, Mississippi, and South Carolina) have laws relating to CSAs, although similar measures have been proposed in other states and at the federal level. CSAs function differently in each location, but they also share a number of similarities, which we’ve outlined below:

  • You must specifically label the account as a Catastrophe Savings Account, segregate it from all other accounts and use it only for this purpose.

  • You can withdraw funds only to pay for qualified catastrophe expenses.

  • You can only designate a CSA for your legal residence, and you and your spouse cannot have separate accounts. Sorry—no vacation homes allowed!

  • State governments cap the total contributions that you can place in a CSA. The amount is determined by your insurance deductible or, for uninsured property, the value of your home.

  • If you contribute more than you’re supposed to or spend CSA money on anything other than qualified catastrophe expenses, you could be forced to pay state taxes on those funds, along with an additional penalty.

Catastrophe Savings Accounts in Alabama

Alabama residents can designate any regular savings account or money market account as a CSA. Once this has been done, any contributions to that account—up to the legal limit—can be deducted from the account holder’s state tax liability. Interest income from the CSA will also be excluded from your taxable income.

So how much can you contribute to a CSA in Alabama? The answer will vary based on your insurance deductible:

  • If your insurance deductible is $1,000 or less, you can contribute up to $2,000.

  • If your insurance deductible is more than $1,000, you can contribute up to $15,000.

  • If your home is uninsured, you can contribute the lesser of $250,000 or the value of your home.

You can find more information about CSAs by visiting the website of the Alabama Department of Revenue.

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Catastrophe Savings Accounts in Mississippi

Here, as in Alabama, homeowners can designate any regular savings account or money market to be a CSA. By doing so, they can shield contributions, interest income, and distributions from the account holder’s Mississippi taxable gross income.

CSA funds can be used to cover the account holder’s insurance deductible, as well as the cost of uninsured losses related to any “catastrophic event.” Qualifying events include windstorms, cyclones, earthquakes, hurricanes, ice storms, tornadoes, high winds, floods, hail, or any other “act of God,” according to the state’s insurance department. The term “catastrophic event” also covers any event declared a disaster by executive order of the president or the governor.

The amount Mississippi residents can contribute to their CSA is defined by statute and will vary based on your insurance deductible:

  • If your 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 amount of your deductible.

  • If your home is uninsured, you can contribute the lesser of $350,000 or the value of your legal residence.

You can learn more about CSAs by visiting the websites of the Mississippi Department of Revenue and the Mississippi Insurance Department.

Catastrophe Savings Accounts in South Carolina

The Palmetto State’s rules around CSAs are a bit more restrictive than those in Mississippi and Alabama. South Carolina residents can deduct CSA contributions, interest income, and distributions from their South Carolina income tax returns. However, CSA funds can only be used to cover expenses related to floods, windstorms, and hurricanes that have been declared an emergency by the governor.

As with other states, the total amount that can be contributed to your CSA will be capped, and the cap will vary with your insurance deductible:

  • If your 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 amount of your deductible.

  • If your home is uninsured, you can contribute the lesser of $250,000 or the value of your home.

You can learn more about CSAs by visiting the website of the South Carolina Department of Insurance.

Catastrophe Savings Accounts: Frequently Asked Questions

  • Yes. If you use money from your CSA for any purpose other than to pay for qualified catastrophe expenses, the withdrawals will be treated as taxable income. You will have to pay state taxes, plus an additional tax of 2.5 percent, on the amount of the excess contributions. This penalty will be waived if you are 70 years old or older or if your principal residence is no longer in the state.

  • It will be your responsibility as the account holder to verify that you’ve spent CSA funds only on qualified catastrophe expenses. In most cases, this will mean keeping receipts for all purchases made with CSA funds, at a minimum.

  • No. A CSA must be tied to a taxpayer’s legal residence, regardless of the state in which that taxpayer resides.

  • Unfortunately, the IRS does not yet allow taxpayers to deduct CSA contributions from their federal taxes, though this could change in the future. Legislators have proposed amending the U.S. Tax Code to include CSAs a number of times, most recently in 2017. However, so far, none of these bills have been successful.

How to Save Money with a Catastrophe Savings Account

A disaster fund can provide an additional layer of protection from unexpected disasters, regardless of where you live. If your primary residence is in Alabama, Mississippi, or South Carolina, you have even more reasons to save. Each of these states allows taxpayers to set aside money in special  “catastrophe savings accounts,” which can be used to pay insurance deductibles and other qualified catastrophe expenses without having to pay a dime on state income taxes.

As we head into one of the busiest hurricane seasons on record, now is a great time to consider whether a CSA might help you be more prepared when disaster does strike. It’s also a good time to compare home insurance quotes to make sure you have the best available coverage. Online home insurance comparison tools like Insurify make that process quick and easy.

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T.S. Strickland
T.S. Strickland

Insurance Writer

T.S. Strickland is an award-winning journalist and brand strategist based in Pensacola, Florida. His work has been published in the Washington Post, USA Today, Entrepreneur, National Fisherman and elsewhere. When he's not writing, T.S. enjoys kayak fishing, cooking and going on walks with his Australian Shepherd, Rosie. He tweets @TSStrickland1.

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