Tax Relief Available to Hurricanes Harvey, Irma and Maria Victims Under the Disaster Tax Relief Act
October 26, 2017
By Alyssa Rausch and Richard Shapiro
Hurricanes Harvey, Irma and Maria brought tremendous devastation to individuals and companies living and operating in these disaster zones. In response to the impact of the hurricanes, President Trump signed into law the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (“Disaster Tax Relief Act”), which provides tax relief for hurricane victims located in federally declared disaster areas (as defined by FEMA at www.FEMA.gov/disasters). Highlights of the Disaster Tax Relief Act are provided below.
Casualty Loss Limitations Minimized
The Disaster Tax Relief Act provides tax relief for individuals who suffered from qualified disaster-related personal casualty losses. Qualified disaster related personal casualty losses are those losses that arose from Hurricanes Harvey, Irma and Maria. Prior to the Disaster Tax Relief Act, taxpayers may deduct as an itemized deduction casualty losses as long as the casualty losses exceed both the $100 per-casualty floor as well as 10% of the taxpayer’s Adjusted Gross Income (AGI). Under the Disaster Tax Relief Act, the 10% limitation requirement has been eliminated, for qualified disaster-related personal casualty losses. However, the $100 per-casualty floor increased to $500. Non-itemizers can take advantage of qualified casualty losses by adding the losses to their standard deduction. Taxpayers subject to the Alternative Minimum Tax and who do not itemize their deductions may also deduct qualified casualty losses.
Special Tax Provision for Determining Earning Income for Purposes of the Earned Income Tax Credit and Child Tax Credit
Special rules are available under the Disaster Tax Relief Act for qualified individuals eligible for the earned income tax credit and/or the child tax credit. Qualified individuals are taxpayers who have a home located in a disaster zone on the date the Hurricane Harvey, Irma or Maria occurred. Qualified individuals may determine the refundable portion of the child tax credit or the amount of the earned income tax credit based on the earned income in 2016 if the earned income in 2017 is less under the Disaster Tax Relief Act. Using higher earned income may allow a taxpayer to take a larger earned income tax credit and/or refundable child tax credit and thus receive a larger refund. This may be beneficial for qualified individuals who have less income in 2017, because they either had to miss work or take a leave of absence in 2017 due to the hurricanes.
Employee Retention Credit Available to Businesses
A credit was established for businesses that retained employees when the business was considered inoperable due to Hurricanes Harvey, Irma and Maria. The credit is 40% of each employee’s qualified wages, limited to $6,000 per employee. Qualified wages are those wages paid during the period the business was inoperable regardless of whether the eligible employee performed services for the business during that time. Eligible employers are employers that have business operations in a hurricane disaster area on the date the respective hurricane occurred and was inoperable on any day after the date the hurricane occurred and before January 1, 2018. Eligible employees are those employees who worked for an eligible employer in the hurricane disaster zone. The work opportunity tax credit may not be claimed for the same employees factored into the employee retention credit.
Individuals & Businesses
Charitable Contribution Limitations Suspended
Percentage limitations are temporarily suspended for qualified contributions under the Disaster Tax Relief Act. Qualified contributions are charitable contributions paid from August 23, 2017 through December 31, 2017 for relief efforts in Hurricane Harvey, Irma, and Maria disaster areas. Prior to the Disaster Tax Relief Act, charitable deductions for individual taxpayers are limited to 50% of an individual’s AGI as well as subject to an overall itemized deduction limitation. Corporate taxpayers are subject to a 10% taxable income limitation. None of these limitations apply for qualified contributions. Written acknowledgement must be provided to the taxpayer to establish the contribution was a qualified contribution.
Retirement Plan Relief
10% Early Retirement Hurricane-Related Distributions Suspended up to $100,000
Qualified retirement distributions made from an eligible retirement plan in the wake of Hurricane Harvey, Irma or Maria are not subject to the 10% early withdrawal penalty up to a maximum of $100,000 under the Disaster Tax Relief Act. Qualified retirement distributions are distributions made on or after the date the hurricane occurred up until January 1, 2019 by taxpayers with a home in the hurricane disaster area and who suffered an economic loss as a result of the hurricane. Eligible retirement plans include 401(k)s, 403(b)s, and IRAs. Taxpayers remain subject to income tax on hurricane distributions, unless the taxpayer decides to repay the distributions over a three-year period. By default, income not repaid will be included in income ratably over a three-year period. An election to include all of the income in the current year is available. Special rules apply to retirement withdrawals for home purchases cancelled in a hurricane disaster area.
Increased Loan Limit from Qualified Plans
Individuals who live in a hurricane disaster area may treat more of their loans from qualified employer plans due to the increased loan limits as loans for tax purposes as opposed to taxable distributions for an applicable period under the Disaster Tax Relief Act. The applicable period is from the date Hurricanes Harvey, Irma or Maria occurred to December 31, 2018. Qualified employer plans include 401(k) plans, 403(b) plans and government Section 457 plans. Loans are not treated as distributions to the extent that the loan amount is the lesser of $100,000 ($50,000 prior to the Disaster Tax Relief Act) or the greater of either $10,000 or the present value of the nonforfeitable accrued benefit of the employee under the plan (“one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan” prior to the Disaster Tax Relief Act). Loan repayments are extended by one year beyond the five-year maximum.
Amending the Qualified Plan
Retroactive amendments to act in accordance with the retirement plan relief are permitted.
Hurricane Tax Extension Deadlines
Due to Hurricanes Harvey, Irma and Maria, the IRS has extended the time to file the following returns to January 31, 2018 for individuals and businesses located in the federally declared disaster areas in Florida, Georgia, Puerto Rico, the Virgin Islands and Texas:
- Individual tax returns due October 16, 2017
- Business tax returns due September 15, 2017
- Third and fourth Quarter tax estimates due September 15, 2017 and January 16, 2018, respectively
- Quarterly payroll and excise tax returns due October 31, 2017
- Tax exempt organizations due November 15, 2017
Extensions granted by the regions primarily impacted by the hurricanes are as follows:
- Florida granted an extension for corporate income/franchise tax returns which are due (including extensions) between August 24, 2017 and January 1, 2018 until February 15, 2018.
- Georgia conforms to the federal relief hurricane extension deadlines for the applicable above returns as well as for Georgia sales and use tax returns.
- Puerto Rico and the Virgin Islands conform to the federal relief hurricane extension deadlines provided above.
- Texas granted a 30-day extension for sales and use tax reports, as well as an extension to January 5, 2018 for the 2017 Texas franchise tax reports.
In the aftermath of Hurricanes Harvey, Irma and Maria, the Disaster Tax Relief Act provides some tax relief to individuals and businesses located in federally declared disaster areas. Certain qualifications must be met to determine if the tax relief measures will benefit you. Please consult with your tax advisor to determine if you or your business qualifies for these tax incentives.