Disaster Loss Deductions
The Act provides relief in a number of ways to taxpayers that suffer a disaster loss in the following areas:
- In the Hurricane Harvey disaster on or after Aug. 23, 2017, and which are attributable to Hurricane Harvey;
- In the Hurricane Irma disaster area on or after Sept. 4, 2017, and which are attributable to Hurricane Irma; or
- In the Hurricane Maria disaster area on or after Sept. 16, 2017, and which are attributable to Hurricane Maria.
The 10% limitation removed. For taxpayers claiming a net disaster loss, the Act eliminates the current law requirement that personal casualty losses must exceed 10% of Adjusted Gross Income to qualify for a deduction.
Relief available to non-itemizers. The Act also eliminates the current law requirement that taxpayers must itemize deductions to access this tax relief for losses—it does so by increasing an individual taxpayer’s standard deduction by the net disaster loss. No reduction for taxpayers subject to AMT.
Increased floor. In addition, the Act increases the $100 per-casualty floor to $500 for qualified disaster-related personal casualty losses.
Eased Access to Retirement Funds
The Act eases a number of rules to allow victims to make “qualified hurricane distributions” from their retirement plans including IRAs of up to $100,000
- On or after Aug. 23, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode on Aug. 23, 2017, is located in the Hurricane Harvey disaster area and who has sustained an economic loss by reason of Hurricane Harvey;
- On or after Sept. 4, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode on Sept. 4, 2017, is located in the Hurricane Irma disaster area and who has sustained an economic loss by reason of Hurricane Irma; and
- On or after Sept. 16, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode on Sept. 16, 2017, is located in the Hurricane Maria disaster area and who has sustained an economic loss by reason of Hurricane Maria.
Penalty relief – the Act excepts qualified hurricane distributions from the 10% early retirement plan withdrawal penalty.
Eased inclusion rules: The Act allows taxpayers to spread out any income inclusion resulting from such withdrawals over a 3-year period, beginning with the year that any amount is required to be included.
Favorable re-contribution rule. The Act also allows the amount distributed to be re-contributed at any time over a 3-year period beginning on the day after the distribution was received. If re-contributed to an eligible retirement plan other than an IRA, the taxpayer is treated as having received the qualified hurricane distribution in an eligible rollover distribution and as having transferred the amount to an eligible retirement plan in a direct, trustee-to-trustee transfer within 60 days of the distribution. If recontributed to an IRA, the qualified hurricane distribution is treated as a distribution that is transferred to an eligible retirement plan in a direct trustee to trustee distribution within 60 days of the distribution.
Example: If a plan participant receives a qualified hurricane distribution in 2017 he will pay regular tax on it (spread out over 3 years) but not the 10% penalty tax. If he recontributes the qualified hurricane distribution amount in 2018, he may file an amended return and get a refund of the tax he paid on his 2017 return for the distribution.
No withholding is required on such distributions.
Eased Rules for Retirement Plan Loans
The Act provides the following:
- Increases the maximum amount that a participant or beneficiary can borrow from a qualified employer plan from $50,000 to $100,000;
- Removes the “one half of present value” limitation; and
- Allows for a longer repayment term, if the due date for any repayment with respect to the loan occurs during a qualified beginning date that is Hurricane-specific and ends on Dec. 31, 2018, by delaying the due date of the first repayment by one year
Charitable Deduction Limitations Suspended
For qualifying charitable contributions associated with qualified hurricane relief, the Act:
- Temporarily suspends the majority of the limitations on charitable contributions;
- Provides that such contributions will not be taken into account for purposes of applying percentage limitations and carryforward limitations.
- Provides eased rules governing the treatment of excess contributions; and
- Provides an exception from the overall limitation on itemized deductions for certain qualified contributions.
“Qualified contributions” must be paid during the period beginning on Aug. 23, 2017, and ending on Dec. 31, 2017, in cash to a charitable organization for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas. Qualified contributions must also be substantiated, with a contemporaneous written acknowledge that the contribution was or is to be used for relief efforts and the taxpayer must make an election. For partnerships and S corporations, the election is made separately by each partner or shareholder.
Employee Retention Tax Credit for Employers
The Act provides a new “employee retention credit” for “eligible employers” affected by Hurricanes Harvey, Irma, and Maria. Eligible employers are generally defined as employers that conducted an active trade or business in a disaster zone as of a specified date (for Hurricane Harvey, Aug. 23, 2017; Irma, Sept. 4, 2017; and Maria, Sept. 16, 2017), and the active trade or business of which was, on any day between the specified date and Jan. 1, 2018, rendered inoperable as a result of damage sustained by the hurricane.
In general, the credit is equal to 40% of up to $6,000 of “qualified wages” with respect to each “eligible employee” of such employer for the tax year.
Thus, the maximum credit per employee is $2,400 ($6,000 × 40%).
Example: Employer X is an eligible employer in the Hurricane Harvey disaster zone. X has two eligible employees, A and B, to whom X pays qualified wages of $4,000 and $7,000 respectively. X is entitled to a total credit of $4,000; $1,600 for the wages paid to A ($4,000 × 40%) and $2,400 for $6,000 of the wages paid to B ($6,000 × 40%).
An eligible employee with respect to an eligible employer is one whose principal place of employment with the employer was in Hurricane Harvey, Irma, or Maria disaster zone as of the respective date above.
Qualified wages mean wages paid or incurred by an eligible employer with respect to an eligible employee on any day after the specified date above and before Jan. 1, 2018, which occurs during the period: (i) beginning on the date on which the employer’s trade or business first became inoperable at the principal place of employment of the employee immediately before the respective hurricane, and (ii) ending on the date on which such trade or business has resumed significant operations at such principal place of employment. Qualified wages include wages paid without regard to whether the employee performs no services, performs services at a different place of employment than such principal place of employment, or performs services at such principal place of employment before significant operations have resumed.