On September 29, 2017, U.S. President Donald Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Act) into law. In addition to authorizing several airway improvement measures, the legislation also includes various tax provisions intended to provide temporary relief for taxpayers within specific hurricane disaster zones and areas. Significant tax measures within the legislation affect the treatment of casualty losses, charitable contributions and credits for both individual and business taxpayers affected by hurricanes Harvey, Irma and Maria.
Hurricane Disaster Areas
The disaster losses referred to in the new law must be attributable to the following disaster areas as of the given date:
Please visit the FEMA website for a complete list of counties included in these disaster areas.
Under current law, a taxpayer is allowed to claim a deduction for any loss sustained during the tax year that’s not compensated by insurance or other means. For individuals, a personal casualty loss is only deductible to the extent that:
- The loss exceeds $100
- The total of all losses meeting threshold (1) exceeds 10 percent of the taxpayer’s adjusted gross income (AGI) for the year
- The taxpayer opts to itemize rather than take the standard deduction
The new law provides additional relief in regard to disaster casualty losses by eliminating requirements (2) and (3). On the other hand, the $100 threshold in requirement (1) is increased to $500 per instance of disaster-related loss.
Practically speaking, these temporary measures effectively provide an enhanced standard deduction for those taxpayers with net disaster losses exceeding $500. The new law also allows the net disaster loss, determined according to the revised methods above, to be taken as a deduction for purposes of the alternative minimum tax.
Access to Retirement Accounts
No Additional Tax for Early Withdrawal
The new law contains multiple provisions permitting affected taxpayers greater availability to their retirement funds. Under current law, early retirement plan withdrawals are subject to an additional 10 percent tax unless certain exceptions apply; however, the new legislation waives this penalty for individuals with principal residences located within one of the hurricane disaster areas. The retirement distribution must be made by December 31, 2018, and limited to $100,000 to qualify for this relief.
Inclusion of Hurricane Distributions in Income
Affected taxpayers may elect to include hurricane-related distributions in their taxable income over a three-year period, beginning the day after the distribution is received. Alternatively, taxpayers may elect to repay the distributions over that same three-year period to exclude the repayment amounts from income. Relief also is available for taxpayers who received retirement distributions after February 28, 2017, and before September 21, 2017, for the purpose of purchasing or constructing a home. Taxpayers unable to follow through with the purchase or construction on account of Hurricane Harvey, Irma or Maria are allowed to repay the distributions back to the plan without any adverse tax consequences. This “recontribution” payment, or series of payments, must be made by February 28, 2018, to receive this treatment.
Retirement Plan Loans
The new law increases the maximum allowable borrowed amount from an employer plan from $50,000 to $100,000. The law also extends the standard five-year repayment period by an additional year.
For charitable contributions paid in cash to a qualified organization during the period beginning August 23, 2017, and ending December 31, 2017, with the express purpose of providing relief aid to the Hurricane Harvey, Irma or Maria disaster areas, the following limitations typically applied to charitable contribution deductions are suspended:
- The 50-percent-of-AGI limitation applicable to individuals is replaced by a total AGI limitation
- The 10-percent-of-taxable-income limitation for corporations is replaced by a total taxable income limitation
Any qualified disaster contributions limited by these revised thresholds in the current year are subject to the typical five-year carryover periods and will be aggregated with and treated as nondisaster contributions subject to the 50 percent (or 10 percent) limitation in those years.
Taxpayers seeking to deduct qualified disaster contributions should request written documentation from the receiving organization that the contributions will be used for hurricane relief efforts. In addition, taxpayers must make an election on their tax returns to qualify for this specialized treatment. For partnerships and S corporations, this election must be made at the partner or shareholder level.
For purposes of calculating the earned income tax credit and the child tax credit, taxpayers with principal residences located within the above-defined hurricane disaster areas may substitute their previous year’s earned income in place of their current year’s earned income. This substitution can be considered for taxpayers whose current-year earned income is less than that of the previous year.
The new law provides an “employee-retention credit” for eligible businesses affected by hurricanes Harvey, Irma and Maria. To qualify for the credit, the business must have been:
- Located in a disaster zone where it conducted an active trade or business on the date of the disaster
- Rendered inoperable for some period of time after the date of the disaster and prior to January 1, 2018
The employee retention credit equals 40 percent of up to $6,000 of qualified wages for each eligible employee. Qualified wages include those paid from the day after the disaster through the earlier of December 31, 2017, or the date the business was able to resume significant operations. This credit must be taken in lieu of the work opportunity tax credit on an employee-by-employee basis. Furthermore, the credit isn’t allowed for wages paid to an employee related to the employer.
Keep in mind, the new provisions provided by the Act supplement previous disaster relief measures announced by the IRS. See our previous alert for details on these provisions.
For more information on how the Act affects you and your personal tax situation, contact your trusted BKD advisor.