The Federal Emergency Management Agency can provide post-disaster funding for temporary housing, home repairs and medical care. FEMA assistance does not count as taxable income except in special cases where compensation exceeds both the person's tax basis and the costs of repair.
IRS Rules on FEMA Funds
The Internal Revenue Service does not require participants in FEMA's Individuals and Households Program to count the aid received as taxable income. Recipients can receive money for housing relocation and repairs -- the latter of which can also trigger a home insurance payout. The amount of FEMA funds and/or insurance funds may become taxed if it exceeds the tax basis of the home. Basis refers to the amount of capital investment a homeowner has in a property according to tax purposes. If the FEMA and/or insurance funds add up to more than the tax basis, then the excess technically counts as a gain. The IRS also understands that the damage to the property was not voluntary, so the FEMA tax exemption can still stand if the cost of repairs at least equaled the compensation. Recipients will have to provide proof of those costs when filing tax forms.