The IRS is taking active steps to assist taxpayers that have been recently affected by Hurricanes Harvey, Irma, and Maria. On September 29, President Trump signed the “Disaster Tax Relief Airport and Airway Extension Act of 2017,” which provides substantial benefits to those that were hurt and suffered damage from the recent destruction of these hurricanes.
It is important to note that to be eligible for these benefits, damage must have been suffered according to the specific dates and in FEMA-declared areas mentioned below.
• Hurricane Harvey disaster area on or after August 23rd, 2017
• Hurricane Irma disaster area on or after September 4th, 2017
• Hurricane Maria disaster area on or after September 16th, 2017
Individual taxpayers that were affected by the recent storms may qualify for numerous benefits for their tax returns, provided they fit the criteria laid out above. If an individual taxpayer does qualify, he or she would be able to claim a casualty loss. Typically, a casualty loss is an itemized deduction that is subject to a $100 floor, and any amount in excess of that floor must also exceed 10% of the taxpayer’s adjusted gross income (AGI). Most often, this can only be taken as an itemized deduction on a taxpayer’s Schedule A. However, with this new Act, affected individuals can claim a disaster loss that is the excess of qualified disaster losses over personal casualty gains (ex. Insurance). Additionally, the deduction floor is increased to $500, and the 10% AGI limitation is removed, allowing the taxpayer to take a casualty loss without itemizing the deduction. Instead, they can use the standard deduction and the net casualty loss deducted will increase their standard deduction amount. Another great benefit is that the net casualty loss will not be subject to alternative minimum tax rules.
While the IRS previously allowed eligible taxpayers to take qualified distributions and/or loans from a qualified retirement plan for hurricane relief, this new Act provides additional, favorable benefits to those that need to take these distributions, as well as reliable guidance on how to do so.
Either an individual who was affected, or an authorized individual who is related to someone that was affected, can take a distribution and/or loan from their qualified retirement plan. The distribution can be up to $100,000 and will not be subject to withholding rules, and the taxpayer will not be subject to the 10% penalty for early withdrawal. Note, however, that the taxpayer will be subject to regular tax, but the IRS allows the reporting of this income to be spread over a 3 year period. Additionally, qualifying distributions that are re-contributed to the retirement account over a 3 year period will be treated as a typical tax-free rollover, made within the required 60 day time frame.
Companies that were conducting business or engaged in active trade in a disaster zone and were deemed inoperable from the specified dates above until January 1st, 2018, will be eligible for a new “employee retention credit.” The credit is equal to 40% of up to $6,000 in qualified wages for each approved employee. An approved employee’s principal place of employment must be with an employer whose business operations were affected during the dates and storms listed above. Each credit is per employee and is limited to one hurricane.
Finally, the legislation is suspending limitations of qualified charitable contributions related to hurricane relief for both individuals and businesses.
Please consult with a professional advisor prior to taking these benefits, as there may be additional steps or elections needed in order to qualify.