“Provisions in the 2017 Disaster Tax Relief Bill” by Kathy Davis | Senior Manager – Tax
On September 29th, the President signed into law, a tax bill to provide temporary tax relief to victims of Hurricanes Harvey, Irma and Maria. Individuals may benefit from loosened restrictions for claiming personal casualty losses and tax-favored withdrawals from retirement plans. In addition, businesses that qualify for relief may claim a new “employee retention tax credit” for wages paid to eligible employees.
Eased Casualty Loss Rules
Currently taxpayers may claim a deduction for losses not compensated by insurance or otherwise. To qualify for the deduction, the taxpayer has to itemize deductions, the loss must exceed $100, and only the portion that exceeds 10% of the taxpayer’s adjusted gross income is deductible. Taxpayers may elect to take into account the casualty loss in the tax year immediately preceding the tax year in which the qualifying disaster occurs (by amending 2016 return).
New Law – Qualified disaster-related personal casualty losses occurring in disaster areas that have been declared so by the President, may provide taxpayers the following relief:
- The Act eliminates the current law requirement that personal casualty losses must exceed 10% of adjusted gross income. The total amount of the qualified disaster-related casualty loss in excess of $500 is deductible.
- The Act also eliminates the current law requirement that the taxpayer has to itemize, as the deduction is allowed to be added to the taxpayer’s standard deduction.
Eased Access to Retirement Funds
The Act eases a number of rules to allow victims to make “a qualified hurricane distribution” from eligible plans, for individuals whose principal place of abode is located in either of the three hurricane disaster areas and have sustained an economic loss by reason of one of the hurricanes.
New Law – A distribution that qualifies as a “qualified hurricane distribution” may provide taxpayers with the following relief:
- The Act excepts qualified hurricane distributions from the 10% early retirement plan withdrawal penalty.
- The Act allows taxpayers to spread out any income inclusion resulting from such withdrawals over a 3-year period.
- The Act allows loans up to $100,000 from retirement plans (normal limitation is $50,000), and may allow a longer repayment term then currently required.
- Relief for prior loans made on cancelled home purchases/construction due to the hurricanes, allowing for recontribution of certain retirement plan withdrawals that were received between February 28, 2017 and before September 21, 2017.
Charitable Deduction Limitation
Depending on the type of property contributed and the type of charity, charitable deductions are limited to 50%, 30% or 20% of adjusted gross income. Charitable deductions made by corporations are limited to 10% of taxable income.
New Law– for Qualifying Charitable Contributions associated with qualified hurricane relief, the Act:
- Temporarily suspends the majority of the limitations on charitable contributions that are paid during the period August 23, 2017 and ending on December 31, 2017, to an organization for relief efforts in the three disaster areas. Qualified contributions must be substantiated with a contemporaneously written acknowledgement that the contribution was, or is, to be used for relief efforts.
Employee Retention Tax Credit for Employers
The Act provides a new “employee retention credit” for “eligible employers” affected by any of the three hurricanes. Eligible employers are generally defined as employers that conducted an active trade or business in a disaster zone as of the specified dates for each hurricane and the active trade or business was on any day between that storm’s specified date and January 1, 2018, rendered inoperable as a result of damage sustained by the hurricane.
Qualifying wages mean wages paid during the time the employer’s trade or business first became inoperable at the principal place of employment (before the respective hurricane) and ending on the date on which the trade or business resumed significant operations at such principal place of employment. Qualifying wages include wages paid even though the employee performs no services, wages paid for services at a different location or wages paid before significant operations have resumed.
The minimum credit per employee is equal to 40% of up to $6,000 in qualified wages (thus the maximum credit is $2,400 per employee).
Special Rule on “Earned Income” for the earned income tax credit and child tax credit
The Act provides that “qualifying individuals” whose earned income for the tax year is less than the taxpayers earned income for the preceding year, may substitute the earned income for the prior year in calculating the credit (thus potentially allowing a higher credit). “Qualified individuals” includes those whose principal place of abode is located in either of the hurricane disaster zones on the date of the hurricanes.
If you were affected by one of the three major hurricanes and would like more details about how the new law could benefit you, please contact us today.