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South Carolina Catastrophe Savings Account

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Maybe a little esoteric or geo-limited for a thread, but --

South Carolina residents can establish Catastrophe Savings Accounts to prepare for out-of-pocket costs related to natural disaster. Qualified costs include payment of insurance deductibles and uninsured losses from hurricane, floods or windstorm events.

CSA contributions are TAX DEDUCTIBLE for SC income tax purposes, and annual interest income is nontaxable. Limits are determined by your deductible and home value. For people that SELF INSURE against one of the above perils, you can contribute up to the lesser of $250k or the value of your home.

Withdrawals for eligible expense are NOT includible in SC taxable income. Withdrawals for ineligible expenses are taxable and subject to an additional tax of 2.5% (unless you're >70 yrs old).

More at links below. Would be interested if other states offer anything similar.

http://doi.sc.gov/636/Catastrophe-Savings-Accounts
http://doi.sc.gov/DocumentCenter/View/7663

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Not a bad idea to have state tax benefits for rainy day fund (no pun intended). But what happens if you leave the state?

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Shandril said:   Not a bad idea to have state tax benefits for rainy day fund (no pun intended). But what happens if you leave the state?
  You must be new here.  Puns are highly encouraged.

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Shandril said:   Not a bad idea to have state tax benefits for rainy day fund (no pun intended). But what happens if you leave the state?
  Probably the 0.05% interest you earn on savings accounts also qualifies as a catastrophe.

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burgerwars said:   
Shandril said:   Not a bad idea to have state tax benefits for rainy day fund (no pun intended). But what happens if you leave the state?
  Probably the 0.05% interest you earn on savings accounts also qualifies as a catastrophe.

  0.05%? seriously? That's pathetic.
Could they not at least index it on treasury bond yields or TIPS or even close to long term CD rates like 1.5%? You may still be losing money vs. inflation but 0.05% kills the benefits of tax deductions and tax-deferred gains. 

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burgerwars said:   
Shandril said:   Not a bad idea to have state tax benefits for rainy day fund (no pun intended). But what happens if you leave the state?
  Probably the 0.05% interest you earn on savings accounts also qualifies as a catastrophe.

  Not sure where you're getting the 0.05% rate from.  You can open the account at, say, CIT and get 1.30% plus $100 bonus ($15k new money).

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Shandril said:   Not a bad idea to have state tax benefits for rainy day fund (no pun intended). But what happens if you leave the state?
  Technically speaking, see below (would also apply to out-of-state moves).  Practically speaking, I imagine quite a few people ignore this.

 A non-eligible withdrawal of funds made when the taxpayer no longer owns a legal residence is not subject to the 2.5% additional tax. However, the amount withdrawn is included in South Carolina taxable income.

Example: On Jan. 1, 2007, Donna deposited $6,000 into a catastrophe savings account. On Jan. 1, 2009, Donna sold her home and moved in with her sister. In February 2009, she withdrew $6,000 from her catastrophe savings account for a family emergency. The withdrawal is not subject to the 2.5% additional tax because she withdrew the amount when she no longer owned a home. The $6,000 withdrawal is subject to South Carolina income taxation.

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I think the states themselves need disaster savings accounts. If there are going to be natural disasters, and state and federal govts are going to be expected to shovel out money every time, they should self insure to avoid a shortfall.

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tuphat said:   
burgerwars said:   
Shandril said:   Not a bad idea to have state tax benefits for rainy day fund (no pun intended). But what happens if you leave the state?
  Probably the 0.05% interest you earn on savings accounts also qualifies as a catastrophe.

  Not sure where you're getting the 0.05% rate from.  You can open the account at, say, CIT and get 1.30% plus $100 bonus ($15k new money).

  I'm just saying.  I think Chase and Bank of America still only pay 0.01% on regular savings accounts.  Compared to that, 0.05% looks like a windfall.

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tuphat said:   
Shandril said:   Not a bad idea to have state tax benefits for rainy day fund (no pun intended). But what happens if you leave the state?
  Technically speaking, see below (would also apply to out-of-state moves).  Practically speaking, I imagine quite a few people ignore this.

 A non-eligible withdrawal of funds made when the taxpayer no longer owns a legal residence is not subject to the 2.5% additional tax. However, the amount withdrawn is included in South Carolina taxable income.

Example: On Jan. 1, 2007, Donna deposited $6,000 into a catastrophe savings account. On Jan. 1, 2009, Donna sold her home and moved in with her sister. In February 2009, she withdrew $6,000 from her catastrophe savings account for a family emergency. The withdrawal is not subject to the 2.5% additional tax because she withdrew the amount when she no longer owned a home. The $6,000 withdrawal is subject to South Carolina income taxation.

On $6k, probably fine to ignore the SC state tax liability because it's likely result in a $0 tax bill. But if you withdrew $200k for self-insuring your home, it'd be a different situation I imagine. But anyway that's what I thought about the case where you no longer own a property in SC. State tax but not penalty would apply then on the full withdrawal - maybe unless you're over 70.  

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Lol. Maybe .00001% of SC residents could ever save $200k in one of those accounts. The vast majority of these will have <$1k.

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An exemption from state tax only? Yawn.

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It's better than a kick in the jimmies. Not applicable for me, but I'd check to see if there's any holding period at all. I bet you can pass money for eligible expenses right through one of these accounts, no need to sink a bunch into it before you know you've got the expenses due. Get the account set up now and if you do have these recovery expenses, you get a small state tax break for an extra ACH hop.

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TravelerMSY said:   An exemption from state tax only? Yawn.
  Deduction for the contribution, exemption for the annual earnings.  So, if you self-insure on wind, and have $250k of SC taxable income over X years, you could wipe out your SC tax liability over the same period with contributions to the account.

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