The Disaster Tax Relief and Airport and Airway Extension Act of 2017 (“Disaster Tax Relief Act” or “Act”), which President Donald Trump signed into law on September 29, 2017, contains a wide range of practical, common sense provisions meant to help victims of Hurricanes Harvey, Irma and Maria. Taking a high altitude look at the goals of this Act, the Disaster Relief Act aims to:
- Encourage charitable giving for hurricane ravaged areas
- Help individuals tap into retirement savings without penalty and claim larger deductions for uncompensated hurricane-related losses
- Aid businesses that continued to pay employees although they had to close during any of the storms
In addition, the Internal Revenue Service (“IRS”) recently announced it is easing the rules for the owners and operators of low-income housing projects who provide temporary emergency housing for hurricane victims.
Who Is Eligible
The Disaster Relief Act stipulates that taxpayers in any of the presidentially declared disaster areas are eligible to receive the benefits. If you aren’t sure if where you live is a designated disaster area, you can look up specific locations on the website of the Federal Emergency Management Agency (“FEMA”) to determine if your area was declared a disaster area. FEMA is the authoritative source. Anyone who lives or has a business in Florida, Georgia, Puerto Rico, St. Croix, St. John or St. Thomas qualifies for the relief provided in this bill, except as otherwise noted.
Help for Employers
Businesses that couldn’t operate during the storms and in the days after may be eligible for a tax credit. If you paid employees while your business was closed because of one of the hurricanes, you may be eligible for a credit of 40 percent of each employee’s wages, not to exceed $6,000 per employee. The way the credit works is:
- The employee’s principal place of employment has to be in a disaster zone.
- For each day the business can’t operate as a result of the hurricane before January 1, 2018, the employer can get a credit for wages paid – even if the employee returned to work or worked at a different location.
- The credit is available beginning August 23, September 4 and September 16, 2017, for Hurricane Harvey, Irma and Maria, respectively. Wages paid to family members aren’t eligible for the credit.
- The Work Opportunity Tax Credit (“WOTC”) cannot be claimed on the same employees.
- Controlled groups of corporations will be treated as a single employer.
While businesses located in all of Puerto Rico and the U.S. Virgin Islands are considered to be in a disaster zone for this purpose, portions of Florida (primarily the Panhandle) are excluded from eligibility. In Georgia, only business operating in the following seven counties are eligible for the credit: Campton, Charlton, Chatham, Coffee, Glynn, Liberty and McIntosh.
Deductions for Casualty Losses
Under normal rules, you can deduct casualty losses after a disaster as an itemized deduction to the extent that they exceed 10 percent of the taxpayer’s adjusted gross income (“AGI”) – and as long as the loss is uncompensated from any source, such as insurance or federal aid.
The Disaster Relief Act waives the 10 percent threshold for victims of the three recent hurricanes. Now, hurricane-affected taxpayers can deduct any uncompensated casualty loss with a value greater than $500, whether or not they itemize deductions on their tax returns.
In order to determine the total deduction amount, personal casualty gains, which can result from insurance payments for damaged property, need to be calculated and subtracted from the total losses incurred. For example, if a house worth $200,000 is destroyed, and a homeowner receives a $150,000 payment from the insurance company and another $35,000 payment from FEMA, the net casualty loss that can be claimed is $15,000. ($150,000 + $35,000 – $200,000).The Act permits taxpayers who do not itemize deductions to add the net casualty loss to their standard deduction.
Encouraging Charitable Contributions
This Act increases the amounts for which individuals and corporations can claim charitable deductions given to disaster relief efforts. Under normal circumstances, individuals can deduct up to 50 percent of their AGI for cash charitable contributions, and corporations can deduct up to 10 percent of their taxable income. If a taxpayer, either individual or corporate, donates more than this percentage of their AGI and can’t use the whole deduction in one year, they can carry forward the remaining amount for up to five years. The same percentage limitations apply over those five years, as well. Any deduction amount not used over those five carryover years is lost.
Under this Act, cash contributions that taxpayers make to most charitable organizations between August 23 and December 31, 2017, inclusive of these dates, won’t be subject to these limits, as long as the donations go toward relief efforts in the designated hurricane disaster areas. In order to get these benefits, the charitable organization that receives the donation has to give confirmation in writing that the contribution was or will be used for hurricane relief efforts. Contributions to private foundations, supporting organizations and donor advised funds don’t get this special treatment.
The new guidelines are:
- Individuals can elect to deduct qualifying cash contributions up to their AGI, minus any other allowable charitable contributions. For qualified contributions that exceed AGI, the excess amount can be carried over and applied to the next five tax years.
- Corporations have a similar set-up: They can elect to deduct qualifying contributions up to their taxable income, minus other allowable charitable contributions, and any excess amount can be carried over the next five tax years.
- Contributions deductible because of this Act will not be subject to the limits on itemized deductions.
- For partnerships and S corporations, the election is made by each partner or shareholder.
Again, these rules only apply to charitable donations made specifically for and confirmed to be used for Hurricanes Harvey, Irma and Maria relief.
Accessing Retirement Plan Funds to Help with Hurricane Recovery
This Act does a lot to help individuals access money they have saved away for retirement and use it to help them rebuild their homes and their lives.
No penalty for early withdrawal
Individuals who had their principal home in a hurricane disaster area on the date when the hurricane hit and who suffered economic loss as a result can withdraw retirement funds without being charged the 10 percent penalty for early withdrawal. The applicable period for each hurricane begins August 23 for Harvey, September 4 for Irma, and September 16 for Maria, 2017. Each period ends on December 31, 2018.
Qualified retirement plans, including 403(b) annuities, governmental 457 deferred compensation plans and IRAs, can make the hurricane relief distributions. The maximum total amount individuals can receive (even across multiple accounts or years) is $100,000.
These plan distributions are subject to income tax. However the Act offers help to taxpayers in three ways:
- Taxpayers can elect to report the income over a three-year period rather than all in one year.
- Taxpayers can recontribute the distribution to the retirement plan during the three-year period after withdrawal. The amount repaid does not need to be included in income.
- Hurricane relief distributions are exempt from mandatory income tax withholding that normally applies to plan distributions.
Returning retirement plan contributions for cancelled home purchases
Anyone who took out a home-buyer distribution from an eligible retirement plan between February 28 and September 21, 2017, but who then couldn’t purchase or build their home because of the hurricane has until February 28, 2018, to recontribute the funds to the retirement plan. The recontributed funds would not be included in taxable income.
Getting loans from retirement plans
Qualified retirement plans can loan up to $100,000 to any individual whose principal residence was in a designated disaster area at the official start of each disaster (August 23 for Harvey, September 4 for Irma and September 16 for Maria, 2017). These loans can be made between September 29, 2017, and December 31, 2018, inclusive.
The actual amount that an individual can borrow from retirement savings will depend on the account value and any existing loans already in place. Any advances in excess of the new loan limits may be included in taxable income.
In addition, the Act permits qualified individuals to take an extra year to repay outstanding loans from retirement plans beyond the usual five-year repayment period. They can also postpone any repayments otherwise due during the period beginning with the official start of the disaster that impacted them and ending on December 31, 2018. The payment schedule must be updated to reflect the later due date and any accrued interest.
Plan amendments
Operating documents for qualified plans and annuities may be amended retroactively to comply with this Act, as long as the change is made no later than the last day of the first plan year beginning on or after January 1, 2019. (This date may change if the Treasury Department provides a later date in the future.) Governmental plans get an extra two years to make plan amendments.
Temporary Disaster Relief for Low-income Housing Credit
In a news release, the IRS outlined steps it will take to provide additional relief to the owners and operators of low-income housing who are stepping up to provide temporary emergency housing to anyone affected by these disasters. The announcement says:
- Owners and operators may disregard certain low-income housing requirements, such as income limits and transience rules.
- Temporary emergency housing can be provided anyplace in the country to individuals who previously lived in areas designated for individual assistance by FEMA.
Low-income housing owners and operators don’t have to offer temporary housing to victims, but if they do, these procedures will make it easier for them to do so without jeopardizing their tax credits.
Action Steps
More guidance comes out every day from Congress, the IRS, and other government agencies, all aimed at helping individuals and businesses recover faster from these devastating hurricanes. It can be a lot to keep up with. Feel free to reach out to us at Cherry Bekaert with your questions. We’ll be happy to put you in touch with the right advisor in your area with the specialty expertise you need to help you get through this more easily.
