Taxpayers Offered Relief After Slew of Disasters
Due to multiple natural disasters hitting the United States in recent weeks, several measures have been taken to offer much needed tax relief to those affected. Special tax considerations have been issued for disaster losses in California and President Trump has signed into law a temporary tax relief bill for victims of Hurricanes Harvey, Irma, and Maria.
California Fire Relief
In response to several fires raging in California’s wine country, on Monday, October 9, Governor Brown declared a state of emergency in eight counties across Northern California. California taxpayers affected by these fires may deduct a disaster loss for any loss sustained in an area declared in a state of emergency. To qualify, the loss must be a result of the declared disaster.
Californians who sustained losses in areas declared under a state of emergency dating back to January 1, 2014 may also deduct their disaster losses. Declared disasters include fires, draughts and flooding across the state. For a full list of the qualifying disasters, please visit: https://www.ftb.ca.gov/forms/misc/1034.pdf.
The IRS has released its annual list of counties reportedly affected by severe draught during the last 12 months. Ranchers and farmers from 42 states who were forced to sell their livestock due to extreme draught will have an extended period to replace the livestock and defer tax on any gains from the sales. Taxpayers who qualified for a four-year replacement period set to expire at the end of 2017 will be extended to end of next year.
On September 28, Congress approved the “Disaster Tax Relief and Airport and Airway Extension Act of 2017,” which was swiftly signed into law the next day. Here is recap of some of the new laws offering relief.
Eased Casualty Loss Rules
For those that have a “net disaster loss” for any tax year, the Act will eliminate the current law requirement that uncompensated personal casualty losses must exceed 10 percent of adjusted gross income (AGI) to qualify for a deduction. It will also eliminate the existing requirement that taxpayers must itemize deductions to access this tax relief. For the tax code that generally disallows the standard deduction for alternative minimum tax (AMT) purposes, the Act will not apply for the newly increased portion of the standard deduction attributable to the net disaster loss. Lastly, the Act increases the $100 limitation per casualty to $500.
Liberalized IRA and Retirement Plan Rules
The Act allows disaster victims penalty-free access to their retirement funds, including withdrawals up to $100,000. It provides an exception to the 10 percent early retirement plan withdrawal penalty for qualified hurricane relief distributions. It 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. It also allows taxpayers to include income resulting from such withdrawals ratably over a 3-taxable-year period, beginning with the taxable year that any such amount is required to be included, unless the taxpayer elects out of this treatment.
The Act allows for the re-contribution of certain retirement plan withdrawals for home purchases or construction where the home purchase or construction was cancelled due to eligible disasters, such as Hurricane Harvey, Irma, or Maria.
For retirement plan loans, the Act increases the maximum amount that a participant or beneficiary can borrow from a qualified employer plan from $50,000 to $100,000. It removes the “one half of present value” limitation, and delays certain repayment dates. It allows for a longer repayment term by delaying the due date of the first repayment by one year and adjusts the subsequent due dates of repayments accordingly.
Charitable Deduction Limitations Suspended
The Act encourages charitable giving by temporarily suspending limitations on the deduction for charitable contributions associated with qualified hurricane relief made before December 31, 2017.
Employee Retention Tax Credit for Employers
The Act grants much needed tax relief for businesses, such as providing a new “employee retention credit” for “eligible employers” affected by the hurricanes. The credit equals 40 percent of up to $6,000 of qualified wages with respect to each eligible employee for the tax year.
Special Rule on “Earned Income” for EITC & CTC Purposes
Current law allows an earned income tax credit (EITC) equal to the credit percentage of earned income for the tax year. Current code also allows individuals to claim a $1,000 child tax credit (CTC) for qualifying children claimed as a dependent. The Act allows taxpayers to substitute 2016 earned income for the 2017 amount if the 2016 amount is higher, which provides a bigger credit for 2017.
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