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Disaster Tax Relief Becomes Law; Provides Enhanced Casualty Loss Deductions and Other Tax Breaks to Hurricane Victims

(Parker Tax Publishing October 2017)

Last week, the President signed into law the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Act), providing multiple tax relief measures to victims of Hurricanes Harvey, Irma, and Maria. In addition to increasing the amount of deductions for personal casualty losses and making the deduction available to taxpayers who take the standard deduction, the Act also provides for employment-related tax credits, relaxes retirement plan rules, suspends limitations on charitable contributions, and makes it easier for taxpayers to meet income requirements for the earned income tax credit and the child tax credit. H.R. 3823 (9/29/2017).

Practice Aids - Sample Client Letters: Hurricane Harvey tax relief, Hurricane Irma tax relief, and Hurricane Maria tax relief.

The Act also extends several federal aviation programs, aviation taxes, and public health programs and modifies requirements for purchasing flood insurance. It extends through March 31, 2018, the expenditure authority for the Airport and Airway Trust Fund and the taxes that finance the fund, including fuel taxes, ticket taxes, and taxes related to fractional ownership programs.

Enhancements to Casualty Loss Deduction Rules

Generally, the deduction for a casualty loss of personal-use property is subject to a $100 reduction rule (only losses above $100 are counted) and the loss is limited to the extent it exceeds 10 percent of the taxpayer's adjusted gross income. The new law removes the 10 percent of adjusted gross income limitation, but increases the $100 floor to $500. It also allows individuals to claim a casualty loss even if they do not itemize their deductions by adding the amount of the loss to their standard deduction.

To qualify, a loss must be attributable to a federally declared disaster and occur in an area determined by the President to warrant assistance by the federal government under the Stafford Act. The deduction is limited to the "net disaster loss" which consists of the excess of personal casualty losses attributable to a federally declared disaster over personal casualty gains.

Employee Retention Tax Credit Available to Businesses

The act provides that eligible employers with an employee retention credit of 40 percent of qualified wages with respect to each eligible employee for 2017. The amount of qualified wages which may be taken into account cannot exceed $6,000 paid to an eligible individual (making the maximum credit $2,400 per eligible employee).

A taxpayer is considered an eligible employer if it conducted an active trade or business on the applicable disaster date for the taxpayer's location, and the trade or business was inoperable on any day after that date and before January 1, 2018, as a result of damage sustained by reason of the Hurricane which affected the taxpayer's location. Applicable disaster dates are as follows: August 23, 2017 for Hurricane Harvey; September 4, 2017 for Hurricane Irma; and September 16, 2017 for Hurricane Maria.

An eligible employee means an employee whose principal place of employment on the applicable disaster date, with such eligible employer was in the applicable Hurricane disaster zone.

Retirement Plan Rules Relaxed

The Act contains the following relief provisions regarding retirement plans:

(1) The 10 percent early withdrawal penalty tax in Code Sec. 72(t) will not apply to any qualified hurricane distribution made from a taxpayer's qualified retirement plan.

(2) The aggregate amount of distributions from a qualified retirement plan received by an individual which may be treated as qualified hurricane distributions for any tax year cannot exceed the excess (if any) of (i) $100,000, over (ii) the aggregate amounts treated as qualified hurricane distributions received by such individual for all prior tax years.

(3) If a distribution to an individual would (without regard to (2), above) be a qualified hurricane distribution, a plan will not be treated as violating any requirement of the Code merely because the plan treats such distribution as a qualified hurricane distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $100,000.

(4) Any individual who receives a qualified hurricane distribution may, at any time during the three-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Secs. 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or Code Sec. 457(e)(16). If such contributions are made with respect to a qualified hurricane distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer will, to the extent of the amount of the contribution, be treated as having received the qualified hurricane distribution in an eligible rollover distribution and as having transferred the amount to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution. If such contributions are made with respect to a qualified hurricane distribution from an individual retirement plan, then, to the extent of the amount of the contribution, the qualified hurricane distribution will be treated as a distribution described in Code Sec. 408(d)(3) and as having been transferred to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution.

(5) In the case of any qualified hurricane distribution, any amount required to be included in gross income for such tax year will be includible ratably over the three-tax-year period beginning with such tax year, unless the taxpayer elects not to have this rule apply for any tax year. For purposes of this provision, rules similar to Code Sec. 408A(d)(3)(E), relating to an acceleration of the inclusion of such amounts in income, apply.

(6) Any individual who received a qualified distribution may, during the period beginning on the applicable disaster date for the taxpayer's location (e.g., August 23 for Hurricane Harvey), and ending on February 28, 2018, make one or more contributions in an aggregate amount not to exceed the amount of such qualified distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Secs. 402(c), 403(a)(4), 403(b)(8), or Code Sec. 408(d)(3), as the case may be.

(7) The limit on loans from a qualified employer plan to a qualified individual that are not treated as taxable distributions is increased from $50,000 to $100,000, and the repayment of such loan may be delayed from the regular repayment term by an additional year.

Modification of Earned Income for Purposes of the Earned Income Credit and Child Tax Credit

If a taxpayer is eligible for the earned income credit and the child tax credit for 2017, and the taxpayer's earned income for the 2017 tax year is less than the taxpayer's earned income for 2016, the earned income credit and child tax credit may, at the taxpayer's election, be determined by substituting 2016 earned income for 2017 earned income. For residents of Puerto Rico determining the child tax credit, social security taxes are used instead of earned income.

Suspension of Limitations on Charitable Contributions

A temporary suspension of the limitations on charitable contributions applies with respect to qualified contributions, which are defined as those made between August 23, 2017, and December 31, 2017, to a charitable organization and made for relief efforts with respect to the hurricane disaster areas. The taxpayer must make an election to apply these rules. In the case of a partnership or S corporation, the election is made separately by each partner or shareholder.

For a discussion of special tax rules relating to disaster relief, see Parker Tax ¶79,300.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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