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Checkpoint Special Study: Tax Provisions in the 2017 Disaster Tax Relief Bill

On September 28, Congress approved H.R. 3823, the “Disaster Tax Relief and Airport and Airway Extension Act of 2017,” a bill providing temporary tax relief to victims of Hurricanes Harvey, Irma, and Maria. The measure is expected to be swiftly signed into law by President Trump.

The bill was introduced in the House by Ways and Means Chairman Kevin Brady (R-TX) on September 25th. It failed to advance when it was first introduced, but was passed by the House days later on September 28th by a margin of 264 to 165. The Senate passed the bill unanimously on the same day, but added an amendment to it. The House adopted the Senate version by voice vote.

Eased Casualty Loss Rules

Current law. A taxpayer generally may claim a deduction for any loss sustained during the tax year and not compensated by insurance or otherwise. (Code Sec. 165(a)) For individuals, a personal loss from a casualty is deductible only to the extent that (1) it exceeds $100, and (2) all casualty losses (after application of the $100-floor) for the tax year exceed 10% of adjusted gross income (AGI). (Code Sec. 165(h)) If the disaster occurs in a Presidentially declared disaster area, the taxpayer may elect to take into account the casualty loss in the tax year immediately preceding the tax year in which the disaster occurs. (Code Sec. 165(i)) The deduction for casualty losses is an itemized deduction.

New law. For a taxpayer that has a “net disaster loss” for any tax year, the Act:

…eliminates the current law requirement that personal casualty losses must exceed 10% of AGI to qualify for a deduction;
…eliminates the current law requirement that taxpayers must itemize deductions to access this tax relief—put otherwise, it increases an individual taxpayer’s standard deduction under Code Sec. 63(c) by the net disaster loss; and
…provides that Code Sec. 56(b)(1)(E), which generally disallows the standard deduction for alternative minimum tax (AMT) purposes, does not apply for the newly increased portion of the standard deduction attributable to the net disaster loss.

A net disaster loss is the excess of “qualified disaster-related personal casualty losses” over personal casualty gains, as defined in Code Sec. 165(h)(3)(A). Qualified disaster-related personal casualty losses, in turn, are losses described in Code Sec. 165(c)(3) which arise:

…in the Hurricane Harvey disaster area (see below for the distinction between “areas” and “zones”) 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. (Act Sec. 504(b)(3))

The Act also increases the $100 limitation per casualty to $500. (Act Sec. 504(b))

For purposes of the Act, a disaster “zone” means the portion of the disaster area determined by the President to warrant individual or individual and publish assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of the disaster. A disaster “area” means an area with respect to which a major disaster has been declared by the President by reason of the disaster. (Act Sec. 501(a))

Liberalized IRA and Retirement Plan Rules

Current law. A loan from a qualified employer plan to a participant or beneficiary is treated as a plan distribution unless, among other things: (i) the loan amount doesn’t exceed the lesser of: (A) $50,000, or (B) half of the present value of the employee’s nonforfeitable accrued benefit under the plan (however, a loan up to $10,000 is allowed, even if it’s more than half the employee’s accrued benefit) (Code Sec. 72(p)(2)(A)); and (ii) the loan is required to be repaid within five years, (Code Sec. 72(p)(2)(B)(i)) except that a longer repayment can be used for a principal residence plan loan. (Code Sec. 72(p)(2)(B)(ii))

Early (generally, pre-age 59 1/2) withdrawals from a qualified retirement plan result in an additional tax equal to 10% of the amounts withdrawn that are includible in gross income. (Code Sec. 72(t)(1)) The additional tax applies unless the taxpayer qualifies for one of several specific exceptions. (Code Sec. 72(t)(2); Code Sec. 72(t)(3))

New law. The Act allows tax-favored withdrawals from retirement plans, up to $100,000 (less any prior withdrawals treated as qualified hurricane distributions; Act Sec. 502(a)(2)(A)), by:

…providing an exception to the 10% early retirement plan withdrawal penalty for “qualified hurricane distributions” (below); (Act Sec. 502(a)(1)
…allowing the amount distributed to be re-contributed at any time over a 3-year period beginning on the day after the distribution was received; (Act Sec. 502(a)(3)(B)) and
…allowing taxpayers to 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 (or elect out). (Act Sec. 502(a)(5))

The Act also allows for the re-contribution of certain retirement plan withdrawals for home purchases or construction, which were received after Feb. 28, 2017 and before Sept. 21, 2017, where the home purchase or construction was cancelled on account of Hurricane Harvey, Irma, or Maria. (Act Sec. 502(b

With respect to retirement plan loans, the Act:

…increases the maximum amount that a participant or beneficiary can borrow from a qualified employer plan under Code Sec. 72(p)(2)(A), from $50,000 to $100,000; (Act. Sec. 502(c)(1))
…removes the “one half of present value” limitation, and delays certain repayment dates; (Act Sec. 502(c)(1)) and
…allows for a longer repayment term by delaying the due date of the first repayment by one year (and adjusting the due dates of subsequent repayments accordingly). (Act Sec. 502(c)(2))

A “qualified hurricane distribution” is any distribution from an eligible retirement plan, as defined in Code Sec. 402(c)(8)(B), made:

…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. (Act Sec. 502(a)(4)

For purposes of trustee-to-trustee transfer rules under Code Sec. 401(a)(31) and Code Sec. 402(f), and withholding rules under Code Sec. 3405, qualified hurricane distributions wouldn’t be treated as eligible rollover distributions. (Act Sec. 502(a)(6)(A)) And, qualified hurricane contributions are treated as meeting plan distribution requirements of Code Sec. 401(k)(2)(B)(i), Code Sec. 403(b)(7)(A)(ii), Code Sec. 403(b)(11), and Code Sec. 457(d)(1)(A). (Act Sec. 502(a)(6)(B))

Charitable Deduction Limitations Suspended

Current law. An individual who itemizes can deduct charitable contributions up to 50%, 30% or 20% of AGI, depending on the type of property contributed and the type of donee). (Code Sec. 170(b)(1)) A corporation generally can deduct charitable contributions up to 10% of its taxable income. (Code Sec. 170(b)(2)) Amounts that exceed the ceilings (“excess contributions”) can be carried forward for five years by both individuals and corporations, subject to various limitations and ordering rules. (Code Sec. 170(d)) For individuals, charitable contributions are deductible only as an itemized deduction. (Reg. § 1.170A-1(a))

New law. For qualifying charitable contributions associated with qualified hurricane relief, the Act:

…temporarily suspends the majority of the limitations on charitable contributions in Code Sec. 170(b);
…provides that such contributions will not be taken into account for purposes of applying Code Sec. 170(b) and Code Sec. 170(d) to other contributions;
…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 an organization described in Code Sec. 170(b)(1)(A), for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas. (Act Sec. 504(a)(4)) Qualified contributions must also be substantiated, with a contemporaneous written acknowledge that the contribution was or is to be used for relief efforts (Act Sec. 504(a)(4)(A)(ii)), and the taxpayer must make an election for Act. Sec. 504(a) to apply. (Act Sec. 504(a)(4)(A)(iii) For partnerships and S corporations, the election is made separately by each partner or shareholder. (Act Sec. 504(a)(4)(C))

Employee Retention Tax Credit for Employers

Current law. Certain business incentive credits are combined into one general business credit (GBC) for purposes of determining each credit’s allowance limitation for the tax year. A GBC (claimed on Form 3800) is allowed against income tax for a particular tax year and equals the sum of: (1) the business credit carryforwards carried to the tax year, (2) the current year GBC, and (3) the business credit carrybacks carried to the tax year. (Code Sec. 38(a)) A list of the component credits of the current year business credit is provided in Code Sec. 38(b).

New law. The Act provides a new “employee retention credit” for “eligible employers” affected by Hurricanes Harvey, Irma, and Maria (generally defined as employers that conducted an active trade or business in a disaster zone on the date of the disaster and the active trade or business of which, for some period of time following the disaster, was rendered inoperable). In general, the credit is be treated as a credit listed in Code Sec. 38(b), and equals 40% of up to $6,000 of qualified wages with respect to each eligible employee of such employer for the tax year. (Act Secs. 503(a), (b), and (c))

Special Rule on “Earned Income” for EITC & CTC Purposes

Current law. Under Code Sec. 32, an eligible individual is allowed an earned income tax credit (EITC) equal to the credit percentage of earned income (up to an “earned income amount”) for the tax year. For 2017, the earned income amount is $6,670 for taxpayers with no qualifying children, $10,000 for those with one qualifying child, and $14,040 for those with two or more qualifying children.

For purposes of the EITC, earned income includes wages, salaries, tips, and other employee compensation, but only if those amounts are includible in gross income for the tax year; plus net earnings from self-employment less the Code Sec. 164(f) deduction for half of self-employment tax for the year. (Code Sec. 32(c)(2)(A))

Under Code Sec. 24, individuals can claim a $1,000 child tax credit (CTC) for each qualifying child the taxpayer can claim as a dependent. The child must be under 17 and a U.S. citizen or resident alien. (Code Sec. 24(c)) The amount of the allowable credit is reduced (not below zero) by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income (AGI increased by excluded foreign, possession, and Puerto Rico income) above: $110,000 for joint filers, $75,000 for unmarried individuals, and $55,000 for married taxpayers filing separately. (Code Sec. 24(b)) To the extent the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of earned income in excess of a threshold dollar amount. (Code Sec. 24(d))

New law. The Act provides that, in the case of a “qualified individual,” if the earned income of the taxpayer for the tax year which includes the applicable date (i.e., the dates shown in the following paragraph) is less than the taxpayer’s earned income for the preceding tax year, then the taxpayer may, for purposes of the EITC and CTC, substitute the earned income for the preceding year for the earned income for the tax year that includes the applicable date. (Act Sec. 504(c)(1)) If the election is made, it applies for both Code Sec. 24(d) and Code Sec. 32 purposes.

For Hurricane Harvey, a “qualified individual” is one whose principal place of abode on Aug. 23, 2017 was located either in the Hurricane Harvey disaster zone, or in the Hurricane Harvey disaster area and the individual was displaced from their principal place of abode by reason of Hurricane Harvey. Similar definitions apply for Hurricane Irma (using a Sept. 4, 2017 date) and Hurricane Maria (using a Sept. 16, 2017 date). (Act Sec. 504(c)(2))

In the case of joint filers, the above election may apply if either spouse is a qualified individual. (Act Sec. 504(c)(5)

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