Recent Legislation Provides Additional Tax Relief to Hurricane Victims
On September 29, President Trump signed into law H.R. 3823, the “Disaster Tax Relief and Airport and Airway Extension Act of 2017” (“the Act”), providing additional federal tax relief to victims of Hurricanes Harvey, Irma, and Maria. The relief provided by this legislation is in addition to relief which was previously announced by the IRS (see our Special Alert here). The key provisions of this legislation are summarized below.
Temporary Suspension of Charitable Contribution Deduction Limits for Qualified Contributions
Generally, charitable contribution deductions by individuals and businesses are subject to certain percentage limitations based on the individual’s adjusted gross income or the business’ taxable income, depending on the type of property contributed and the type of organization receiving the donation. For example, cash charitable contributions by individuals to public charities are generally deductible up to 50% of adjusted gross income and contributions by corporations are generally limited to 10% of the company’s pretax income calculated before taking the deduction.
Under the Act, these percentage limitations are temporarily suspended for qualified contributions made to organizations of the types described below. For individuals, total charitable contributions can be deducted up to the taxpayer’s adjusted gross income. (Non-hurricane-related contributions continue to be subject to the regular limits.) For corporations, total charitable contributions can be deducted up to the company’s taxable income calculated before taking the charitable deduction. (Non-hurricane-related contributions continue to be subject to the regular limits.)
To qualify for this special treatment, contributions must be paid in cash during the period from August 23 through December 31, 2017, to a charitable organization (other than a supporting organization or a donor advised fund) for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas. Taxpayers also must obtain a contemporaneous written acknowledgment from the recipient organization indicating that the contribution was used (or will be used) for such hurricane relief efforts. Taxpayers must make an election on their applicable tax return to apply these relief provisions.
Increased Casualty Loss Deduction
Individuals may take an itemized deduction on their returns for casualty losses sustained during the year which are not compensated by insurance or otherwise. The deduction amount is generally limited to the amount by which each loss exceeds $100, and to the amount by which the total net casualty losses exceed 10% of the individual’s adjusted gross income (“AGI”).
For qualified disaster-related personal casualty losses, the Act eliminates the requirement that such disaster-related personal casualty losses must exceed 10% of AGI and imposes a $500-per-casualty floor on the loss amount. Thus, the entire amount of the loss over $500 may be deducted to the extent that the loss is not compensated by insurance or otherwise. In addition, the Act provides that the standard deduction for affected individuals is increased by this amount; thus, individuals do not need to itemize deductions in order to take advantage of this relief provision.
A qualified disaster-related personal casualty loss is a personal casualty loss that: (1) arises in the Hurricane Harvey disaster area on or after August 23, 2017, which is attributable to Hurricane Harvey; (2) arises in the Hurricane Irma disaster area on or after September 4, 2017, which is attributable to Hurricane Irma; or (3) arises in the Hurricane Maria disaster area on or after September 16, 2017, which is attributable to Hurricane Maria.
Removal of 10% Penalty Tax and Other Relief for Retirement Plan Distributions
Generally, early withdrawals from a qualified retirement plan are subject to a 10% penalty tax.
Under the Act, qualified hurricane distributions to individuals whose principal place of abode was in a Hurricane Harvey, Hurricane Irma, or Hurricane Maria disaster area (as of August 23, 2017, September 4, 2017, and September 16, 2017, respectively) and who sustained an economic loss as a result of the hurricane, will not be subject to this 10% penalty tax. In addition, taxpayers may spread out any income that is required to be included in their gross income as a result of such withdrawals over a three-year period beginning with the tax year in which the distribution is received. The Act further allows for the distributed amount to be recontributed at any time o
ver a three-year period beginning on the day after the distribution was received. Qualified hurricane distributions are those which do not exceed $100,000 less amounts treated as qualified hurricane distributions in all prior taxable years. For individuals affected by Hurricane Harvey, the distribution must be made on or after August 23, 2017, and before January 1, 2019. For individuals affected by Hurricane Irma, the distribution must be made on or after September 4, 2017, and before January 1, 2019. For individuals affected by Hurricane Maria, the distribution must be made on or after September 16, 2017, and before January 1, 2019.
Increased Limit on Retirement Plan Loans
Generally, the maximum amount that an individual can borrow from a qualified retirement plan is $50,000.
For individuals whose principal place of abode is in a Hurricane Harvey, Hurricane Irma, or Hurricane Maria disaster area, and who sustained an economic loss by reason of the hurricane, the Act increases this maximum loan amount to $100,000 (for loans made between September 29, 2017, and December 31, 2018). Further, the Act provides for delayed loan repayment dates with certain conditions.
Earned Income and Child Tax Credit Relief
The Act provides tax relief for certain individuals affected by Hurricane Harvey, Hurricane Irma, or Hurricane Maria with regard to the child tax credit and earned income tax credit. The Act permits qualifying taxpayers to elect to use their previous year’s earned income when computing the credit amounts, if the current year earned income is less than the previous year’s. Specific rules apply with regard to which individuals are eligible to make this election.
New Employee Retention Tax Credit for Employers
The Act provides tax relief for employers affected by Hurricane Harvey, Hurricane Irma, or Hurricane Maria in the form of an employee retention tax credit which can be utilized to offset the employer’s income tax liability. (Therefore, for nonprofit organizations, this credit would only be applicable to organizations which file Form 990-T in connection with an unrelated trade or business activity or which have taxable subsidiaries.) This credit is available to eligible employers who conducted an active trade or business in a disaster zone as of a specified date for each hurricane, and the trade or business was rendered inoperable on any day between that date and before January 1, 2018, as a result of hurricane damage. Specific rules apply with regard to calculating the amount of this credit.
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