In a four-week period, the United States was struck by three Category 4 hurricanes. The resulting damage is staggering. As humanitarian relief efforts continue, new legislation provides tax relief for those affected by the storms. Additional tax relief provisions have been announced by the IRS.
Disaster Tax Relief Act of 2017
The Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the “Act”), signed into law on September 29, 2017, provides temporary tax relief for those affected by Hurricanes Harvey, Irma, and Maria.
Retirement plan (including IRA) distributions
Pre-existing law. In general, distributions from IRAs and other retirement plans are subject to income tax in the year distributed. A 10% early distribution penalty also generally applies to the taxable portion of distributions before age 59½, unless an exception applies.
Temporary changes. The Act provides that the 10% early distribution penalty will not apply for up to
$100,000 of qualified hurricane distributions from qualified retirement plans. (Distributions must be made before January 1, 2019.) Also, the distribution can be ratably included in gross income over a three-year period. Additionally, the distribution can be recontributed to a qualified retirement plan within three years of the distribution. To qualify, the individual must have a principal place of abode in the hurricane disaster area and have sustained an economic loss from the hurricane.
Retirement plan loans
Pre-existing law. In general, an individual can take a loan from a qualified plan for up to the lesser of (1)
$50,000 or (2) one-half the present value of the nonforfeitable accrued benefit of the employee under the plan (generally with up to a five-year repayment term). Loans cannot be taken from IRAs.
Temporary changes. For a loan to a qualified individual made from September 29, 2017, to December 31,
2018, the Act increases the maximum loan amount to the lesser of $100,000 or the full present value. Due dates for payments under the loan can be deferred for up to one year, and the term of the loan can be extended by one year.
Recontributions of withdrawals for home purchases
For individuals who took a hardship withdrawal from a qualified plan (after February 28, 2017, and before September 21, 2017) to be used to purchase or construct a personal residence in the hurricane disaster areas, but were unable to do so due to the hurricanes, the Act allows them to recontribute the withdrawal amount to an eligible retirement plan between August 23, 2017, and February 28, 2018. This allows the individual to avoid tax on the distributed amount.
Employee retention credit
If a business in the disaster zone was inoperable due to damage sustained from the hurricanes but continued to pay eligible employees during the period of inoperability, the Act allows the employer a maximum $2,400 income tax credit per eligible employee (equal to 40% of qualified wages up to $6,000 paid during the period of inoperability) through December 31, 2017. This employee retention credit is not allowed if the employer is also claiming the work opportunity credit with respect to the employee.
Charitable gifts for disaster relief
Pre-existing law. If an individual itemizes deductions, an income tax charitable deduction is available for gifts to charity. The amount of the deduction is limited to 50%, 30%, or 20% of adjusted gross income (AGI), depending on the type of property and the charity. Amounts disallowed because of the percentage limitations can be carried over for up to five years, subject to the percentage limitations in the carryover years. The charitable deduction is also subject to an overall limitation on most itemized deductions based on AGI.
Temporary changes. The Act makes the 50%, 30%, or 20% of AGI limitations inapplicable for cash contributions made through December 31, 2017, to a qualified charity for relief efforts in the hurricane disaster areas. Nor are such contributions subject to the overall limitation on itemized deductions. They are, however, limited to the excess of AGI over all other charitable gifts that are allowed under the 50%, 30%, or
20% of AGI limitations. An election must be made to obtain this tax relief, and a contemporaneous written acknowledgment obtained from the charity that the contribution is for such hurricane relief efforts.
Casualty loss deduction
Pre-existing law. If an individual itemizes deductions, an income tax deduction is available for net casualty losses. The first $100 of such losses is not deductible; the remaining losses can be deducted only to the extent that they exceed 10% of AGI. Also, the standard deduction is not available for alternative minimum tax (AMT) purposes.
Temporary changes. For qualified disaster-related personal casualty losses, the Act increases the $100 amount to $500 and provides that the 10% of AGI floor does not apply. The standard deduction is increased by the net disaster loss (you do not need to itemize deductions to get this tax relief), and the standard deduction is allowed for AMT purposes to the extent of the net disaster loss.
Child tax credit and earned income credit
Pre-existing law. Certain individuals may qualify for a child tax credit or an earned income credit depending on the amount of their earned income.
Temporary changes. As provided by the Act, qualified individuals with a principal abode in one of the hurricane disaster areas can substitute their earned income from the preceding taxable year for their earned income in the hurricane year when determining their child tax credit or earned income credit.
IRS Guidance (IR-2017-160)
The IRS has provided a rundown of some key tax relief available to victims of Hurricanes Harvey, Irma, and Maria. In general, the relief is provided to individuals in Florida, Georgia, Puerto Rico, the U.S. Virgin Islands, and parts of Texas.
The relief generally postpones various tax deadlines for individuals and businesses to file any return and pay any taxes until January 31, 2018. These include:
- Individual tax returns with an extension due date of October 16, 2017
- Business filers with an extension due date of September 15, 2017
- Quarterly estimated tax payments with due dates of September 15, 2017, and January 16, 2018
- Quarterly payroll and excise tax returns with a due date of October 31, 2017
- Tax-exempt organizations with an extension due date of November 15, 2017
Other provisions include:
- The IRS states that employer-sponsored leave-based donation programs can aid hurricane victims.
Under these programs, employees may forgo their vacation, sick, or personal leave in exchange for cash payments the employer makes before January 1, 2019, to charities providing relief to hurricane victims. Donated leave is not included in the employee’s income, and the cash payments to charity can be deducted by the employer as a business expense.
- Employer-sponsored retirement plans can allow a hurricane victim to take a hardship distribution or borrow up to the statutory limits from the victim’s retirement plans. The guidance states that a person who lives outside the disaster area can use such a distribution or loan to assist a son, daughter, parent, grandparent, or dependent who lived or worked in the disaster area. Hardship withdrawals must be made by January 31, 2018.
- Certain late-deposit penalties for federal payroll and excise tax deposits, normally due during the first 15 days of the disaster period, are waived.
- Individuals and businesses with casualty losses can claim them on the income tax return for the year the loss occurred or the return for the prior year.
- The IRS is waiving the usual fees and expediting requests for copies of previously filed tax returns for disaster-area taxpayers.
- The IRS is urging disaster-area taxpayers who are contacted by the IRS on a collection or examination matter to be sure to explain to the IRS how the disaster impacts them.
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