Wednesday marks the start of hurricane season, those six months when we watch storms spin across the Atlantic and wonder if our homes will be in their path.
Coastal South Carolina residents know the annual drill: check insurance coverage, plan for a possible evacuation, stock up on food and water, and have a "go" kit ready with key documents, medicine, cash and so on.
What some state residents may not know is that South Carolina offers a tax deduction for homeowners who set money aside to cover insurance deductibles related to disasters.
The state also offers a tax credit for those whose insurance premiums are excessive relative to their income.
The state's Catastrophe Savings Account program is a tax incentive to establish an emergency fund.
The program has some limitations, but for older residents, it can amount to free money, regardless of disasters.
Here's how that works:
--State residents who own their primary legal residences and have homeowners' insurance can set up a Catastrophe Savings Account at any state or federally chartered bank. There are also provisions for those who self-insure.
--If your insurance deductible is $1,000 or more, you can put up to $15,000 in the account. That's a lifetime maximum. Money deposited to the account is deductible from taxable state income, so most people would get 7 percent back as a tax reduction or tax refund.
--If you eventually use the money for its intended purposes, the withdrawals and interest earnings are not taxed by the state.
But here's the sweet spot in this tax incentive: Once you hit age 70, you can withdraw the money whenever you like with no fee or penalty so long as you still have a homeowners policy. That means you get to keep the $1,050 from your $15,000 tax deduction, plus any interest.
If you take the money out for ineligible expenses and you're under age 70, the money is taxable and subject to a 2.5 percent penalty. That means you'd have to essentially pay back the tax refund from the contribution, plus additional tax.
The downside to these accounts is that, unlike a retirement savings account, the money must be kept in an interest-bearing bank account and can't be invested in stocks or bonds. Your money would be safe and federally insured, which is the idea, but with little opportunity for growth at current interest rates.
Bottom line: It's a good idea to have an emergency fund, the Catastrophe Savings Account gives you a state income tax break, and the most you're risking is having to pay back your tax refund plus a 2.5 percent penalty on ineligible withdrawals.
And once you hit 70, you can withdraw the money for any reason. (If you no longer own a home, you can withdraw the money without the 2.5 percent penalty, but it would be taxed by the state as regular income.)
For details, visit the S.C. Department of Insurance website, doi.sc.gov.
For those with big insurance premiums relative to their income, there's a state tax credit than can come into play.
The Excess Insurance Premium Credit is available to people who are paying more than 5 percent of their federal adjusted gross income for property and casualty insurance for their legal residence. So, if your AGI is $50,000 and you're paying more than $2,500 for homeowners insurance, you get a tax credit.
A tax credit is a dollar-for-dollar reduction in your state income tax bill, much more valuable than a deduction, which in most cases would cut your S.C. tax bill by 7 cents on the dollar.
The S.C. Excess Insurance Premium Credit is worth up to $1,250 yearly. If you would have qualified last year and didn't realize it, you could file an amended return.
Reach David Slade at 937-5552. For more money-saving tips, go to postandcourier.com/personal_finance.