The Internal Revenue Service and Hawaii Gov. Josh Green said on Wednesday that they would not tax relief payments made to civilians affected by the Red Hill Bulk Fuel Storage Facility water contamination crisis, according to a news release.

What You Need To Know

  • After the Red Hill facility leaked fuel and contaminated the water, the Department of Defense provided relief payments to cover basic living expenses as people relocated

  • The payments given to military service members were previously exempted from federal income tax

  • However, civilians who received payments were sent Form 1099s from the IRS, who calculated the payments as extra income subject to taxation

  • Now, the IRS has said it will exclude relief payments given to civilians from gross income for federal income tax purposes

  • Following the IRS's announcement, Hawaii Gov. Josh Green said he would not require people to pay state taxes on relief payments

The Red Hill facility on Oahu leaked fuel in 2021, which contaminated the aquifer, and approximately 93,000 U.S. Navy water system users were impacted by the tainted drinking water. Many of the Navy water system users relocated for about four months, while the Navy worked to flush the water.

In 2022, the Department of Defense gave military service members, federal civilian employees and other civilians affected by the leaks per diem payments to cover basic living expenses while they were displaced, and for personal property damage expenses related to the Red Hill spill.

The payments given to military service members, their spouses and dependents were previously exempted from federal income tax. However, some civilians who received payments from the DOD’s Emergency and Extraordinary Expense authority were sent Form 1099s from the IRS, calculating the payments as extra income subject to taxation. 

In March, the State of Hawaii Congressional Delegation urged the IRS to consider excluding the payments from gross income under its general welfare exclusion. 

Now, the IRS has said it will exclude relief payments from the DOD given to civilians from gross income for federal income tax purposes. 

“These taxes were unfair and unexpected, and I’m glad we were able to fix this,” said U.S. Sen. Brian Schatz in a statement. “I thank the IRS and DOD for working with us to quickly resolve this. It’s now up to the IRS to make sure that every taxpayer impacted by this mistake is aware of this fix and any taxes on these reimbursements already paid for are returned.”

The governor’s decision to not require families and individuals impacted by the Red Hill fuel crisis to pay state taxes on relief payments provided by the DOD follows the IRS’s announcement. 

“Under these extraordinary circumstances, I applaud the IRS for doing what’s right,” said Green in a statement.

According to the governor’s news release, Director Gary Suganuma of the Department of Taxation will ensure Hawaii's policies align with the IRS’s exemptions for state taxes.

How to amend previously filed taxes

Taxpayers who have already filed their 2022 federal income tax returns and included the payments as gross income should file an amended return on Form 1040-X, and they should mark the top of the form with “Red Hill Relief and begin Part III, “Explanation of Changes,” with “Red Hill Relief.” 

If the tax return was electronically filed, they should electronically file Form 1040-X and the “Explanation of Changes” should begin with “Red Hill Relief.” Many tax software products and tax professionals offer an electronically amended return filing option. 

For state taxes, Suganuma said in a release that taxpayers may submit an amended return by attaching a Schedule AMD to report the exclusion of the Emergency and Extraordinary Expense payments and enter “Red Hill Fuel Spill” as the reason for the amendment under the “Explanation of Changes.”

Taxpayers can check the status of their amended tax returns at Where's My Amended Return?

Michelle Broder Van Dyke covers the Hawaiian Islands for Spectrum News Hawaii. Email her at michelle.brodervandyke@charter.com.

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