Hardship

[cdavis25]

A 401(k) Plan uses the Safe Harbor definition for hardships. A participant has an issue with their water supply into their house. The water has become contaiminated. He wants to take a hardship under the casualty deduction under code section 165. The insurance does not cover the issue. Will this qualify?

[Bird]

If it is in fact deductible under 165 (disregarding the 10% of AGI minimum for taking the deduction), yes. But "an issue with their water supply" is pretty vague and there are requirements to take a casualty loss...I stumbled on a link that says:

According to the IRS,** a casualty is “the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. A sudden event is one that is swift, not gradual or progressive. An unexpected event is one that is ordinarily unanticipated and unintended. An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Generally, casualty losses are deductible during the taxable year that the loss occurred.”

[cdavis25]

Tks Bird. I told the client that the participant should get an opinion from their CPA as to whether they are able to deduct it or not. If the CPA says they will be deducting it, then they can authorize the hardship.