Catastrophe savings accounts allow South Carolina residents to prepare for the financial impact of a catastrophic storm and save on South Carolina income taxes.
Catastrophe savings accounts can be established at a state or federally chartered bank. The money can only be held in an interest bearing account.
The money that is placed in a catastrophe savings account and the annual interest earnings are not subject to state income taxation if left in the account or used for qualified catastrophe expenses. However, the amounts cannot be used to reduce federal income.
Withdrawals for any purchase other than a qualified catastrophe expense are treated as ordinary income and taxed accordingly at the state level. Withdrawals are also subject to a 2.5% additional tax unless the withdrawal falls under one of the exceptions.
Consult a Tax Professional
Remember, this information only attempts to address the kinds of questions people most frequently ask about catastrophe savings accounts. As with any tax matter, and for specific questions regarding catastrophe savings accounts, including which type, if any, is suitable for your situation and how opening an account would affect your particular tax liability, you should consult a tax professional.