At long last, Congress and President Trump have given us a tax bill that provides some real relief for taxpayers impacted by this year’s hurricanes. The “Disaster Relief and Airport and Airport Extension Act of 2017” was signed by the President on September 29.
Although it deals with issues beyond hurricane relief, those issues are not the focus of this article and will not be discussed here. And there are some provisions relating to hurricane disaster losses that do not have widespread application and will not be discussed here.
There are four important segments to the hurricane relief granted by this act.
1) Eased casualty loss rules, 2) Eased access to retirement funds, 3) A suspension of charitable deduction limitations. And 4) A special rule for ETC and CTC purposes.
Earned Casualty Loss Rule
Under current law, an individual can only deduct a casualty loss if itemizing deductions. And then it can only be deducted to the extent it exceeds $100 and 10 percent of the taxpayer’s adjusted gross income.
Under the new law, a loss relating to Hurricanes Harvey, Irma, or Maria will receive special treatment. The 10 percent amount is waived, but the $100 floor is increased to $500 per casualty. In addition, the loss may be deducted even if the taxpayer does not itemize deductions. Thus, the covered disaster loss would be added to the taxpayer’s standard deduction or other itemized deductions, whichever is larger. Additionally, there will be no reduction in the amount of the deduction for AMT purposes.
Finally, the taxpayer may elect to include the disaster loss on his or her 2016 return. If the return has already been filed, a 1040X amended return may be submitted.
Eased Access to Retirement Funds
Previously, a loan from a qualified employer plan would be treated as a distribution subject to certain limitations. The limit for a loan was the lesser of $50,000 or half the balance in the account. A withdrawal would be treated as a non-qualified withdrawal, subject to regular tax plus the 10% early distribution penalty if the taxpayer was under age 59 ½. These can be characterized as loans or distributions.
The new law allows hurricane victims to make “qualified hurricane distributions” from a retirement plan up to $100,000. A qualified distribution is defined as any distribution from an eligible retirement plan made on or after August 23, for Harvey victims, on or after September 4, 2017 for Irma victims, and on or after September 16, 2017 for Maria victims. In all three cases, the distribution must be made before January 1, 2019.
The law exempts these distributions from the 10 percent early withdrawal penalty. In addition, although the distribution is subject to regular taxation, the income may be included over a three-year period beginning with the year that the distribution would normally be included in income. Additionally, the law allows the amounts distributed to be re-contributed over a three-year period beginning on the day after the distribution was made.These distributions are not subject to the 20% withholding that is normally required for early distributions from retirement plans. Also, if a taxpayer had withdrawn from a retirement plan up to $10,000 for the purchase of a new home, this distribution was made after February 28, 2017, and the home purchase was
These distributions are not subject to the 20% withholding that is normally required for early distributions from retirement plans. Also, if a taxpayer had withdrawn from a retirement plan up to $10,000 for the purchase of a new home, this distribution was made after February 28, 2017, and the home purchase was canceled before September 21, 2017, the funds may be re-contributed with no tax consequences.
Suspension of Charitable Deduction Limitations
Under current law, charitable contributions are limited to 50, 30, or 20 percent of the taxpayer’s adjusted gross income, depending on the nature of the contribution. For a corporation, the limit is 10 percent of taxable income.
If a charitable contribution is associated with hurricane relief is made beginning August 23, 2017, and by December 31, 2017 these limits do not apply.
Special Rule on Earned Income
Current law provides for a taxpayer to receive an earned income credit or a refundable child tax credit if the taxpayer meets certain earned income limitations. The new law will allow a taxpayer residing in one of the affected areas on the date of the disaster to uses earned income for 2016 if it is lower than 2017 earned income. This is for the purpose of calculating the 2017 earned income credit or the child tax credit.
These are some significant tax benefits being granted to hurricane victims. You should consult your tax return preparer for details on these benefits.
Have questions? Contact John Stancil