President Trump Signs Disaster Tax Relief Act Regarding Hurricanes
On Friday, September 29, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017. This Act contained several tax provisions for hurricane relief.
A quick summary of the details are provided below. In all instances, the taxpayer, or the taxpayer’s business, must be located within the specific hurricane-related disaster zone as defined in The Act, to be eligible. At present, those Texas counties are: Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Calhoun, Chambers, Colorado, Dallas, De Witt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, and Wharton. For the most recent list of counties included, go to the IRS website, www.irs.gov/newsroom/help-for-victims-of-hurricane-harvey.
If you feel you may qualify, or have any further questions, please contact your Melton & Melton team member for additional guidance.
Casualty losses – To the extent that the loss exceeds $500, taxpayers can deduct uncompensated casualty losses. This is true even if the loss didn’t meet the minimum threshold for the deduction, which is 10% of adjusted gross income (AGI). This deduction would be net of any personal casualty gains.
Charitable contributions – Certain limits on cash contributions made to charitable organizations, typically 501 (c) 3 entities, for the period August 23, 2017 – December 31, 2017 are suspended. These limits are suspended only if the contributions are for relief efforts in the hurricane disaster areas. The charitable deduction is normally limited to 50% of AGI for individuals and 10% for corporations. Subject to certain rules, the taxpayer may carry over contributions in excess of the limits for the following five years. If the contribution is not used within the five year carryforward timeframe, the deduction is permanently lost.
In addition, when an individual exceeds a certain AGI threshold, a portion of the taxpayer’s itemized deductions are disallowed. This includes charitable deductions. In this instance, the charitable deduction, up to the amount of qualified contributions paid during the year, is not treated as an itemized deduction for purposes of the overall limitation on itemized deductions.
To qualify for the special charitable contribution treatment, the charitable organization has to provide written confirmation that the contribution will be used in relief efforts. In addition, the taxpayer has to elect for this special treatment. For partnerships or S corporations, this election would need to be made separately for each partner or shareholder.
Credits – The Act provides a special rule for determining earned income in respect of the earned income tax credit and the refundable portion of the child tax credit. In this instance, if a taxpayer’s 2017 income is less than 2016, then the taxpayer can choose to calculate their earned income tax credit and the refundable portion of the child tax credit using their earned income for 2016. The advantage of this change would be higher tax credits if the taxpayer missed a significant portion of work in 2017. Individuals would qualify if their principal residence is located in the hurricane disaster zone or in the surrounding area and they were displaced due to the hurricane.
Retirement plans – The Act allows for individuals who suffered economic loss from the hurricane to withdrawal money from their retirement funds without incurring the usual 10% penalty on early withdrawals. To qualify, the taxpayer must have their principal residence located in the hurricane disaster area on the applicable date of Hurricane Harvey and the distribution must be made in the applicable period of August 23, 2017 – January 1, 2019.
The total amount of distributions that can be received by an individual is capped at $100,000. These qualified hurricane distributions can be made from qualified retirement plans, Section 403(b) annuities, governmental Section 457 deferred compensation plans, and IRAs.
The hurricane distributions are taxable, but the distribution may be included in the taxpayer’s taxable income over a three-year period unless the taxpayer elects to include it all in the present year. Another option available to taxpayers is to repay the distribution to a plan over a three-year period. This repayment would allow the taxpayer to avoid including the distribution as income, and therefore, avoid paying tax. In order for this to occur, the plan administrators would need to treat the hurricane distribution repayments as rollovers for non-IRA plans, and as direct trustee-to-trustee transfers for IRS plans. These distributions are exempt from mandatory withholding.
Retirement plan loans – Loans of up to $100,000 are allowed from qualified plans. The applicable loan time frame for Hurricane Harvey is August 23, 2017 – December 31, 2018. There are certain requirements for individuals requesting this type of loan. Repayment of any qualified loans may be extended for six years, instead of the usual five-year maximum. Repayments must be adjusted to reflect the due date delay and accrued interest.
Credit – The Act also creates a credit for businesses that, due to the hurricane, were inoperable, but retained their employees. Employers could receive a credit for 40% of each employee’s wage, not to exceed $6,000 per employee. The principal place of employment must be in a hurricane disaster zone. For businesses, this wage credit is valid from the date the business was inoperable after the hurricane but before January 1, 2018. The credit is for wages paid each day until significant operations resumed. This is true even if the employee returned to work or worked at a different location. This credit is not valid for family members. A controlled group of corporations is considered a single employer. Please note, businesses cannot deduct the work opportunity credit for the same employees.
We sincerely hope you and your family fared well during Hurricane Harvey. If you were affected by Harvey, some tax relief assistance may be available. Please know that we are available to advise you during this critical time.