2017 Year-end tax letter | Hurricane tax relief enacted

H.R. 3823, the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Act), provides several temporary tax relief measures for victims of Hurricanes Harvey, Irma and Maria. The bill specifically:

  • eases the rules governing the deductibility of casualty losses,
  • allows for the withdrawal of funds from retirement accounts without penalty,
  • suspends the majority of the limitations on the deductibility of charitable contributions,
  • provides for an employee retention credit, and
  • allows taxpayers to use their prior-year earned income (if higher than current year) for the purpose of maximizing the earned income tax credit (EITC) and child tax credit (CTC).

The chart below illustrates relief provided by the Act, comparing the modified rules, limitations and penalties to otherwise-governing law.

Several states have separately made announcements, issued guidance and/or legislation offering various forms of relief in response to the hurricanes.

If you have been affected by the hurricanes, we encourage you to discuss your eligibility for this relief with your Baker Tilly advisor.

Current lawRelief
Eased casualty loss rules
  • § 165(a) generally allows a deduction for any loss sustained during the tax year not compensated by insurance or otherwise
  • Per § 165(h), individuals may deduct a personal loss from a casualty to the extent it:
    1. exceeds $100, and
    2. all casualty losses for the tax year (after application of the $100 floor) exceed 10% of AGI
  • § 165(i) allows a casualty loss to be taken in the preceding tax year if it occurs in a presidentially declared disaster area
  • Deductions for casualty losses are itemized
  • Eliminates requirement that casualty losses must exceed 10% of AGI
  • For taxpayers who do not itemize, the loss will increase the standard deduction, with the portion attributable to the casualty loss allowed for AMT purposes
  • Increases the $100 per-casualty floor to $500
  • Qualified disaster-related losses are deemed to arise in the following disaster areas, if attributable to the corresponding hurricanes:
    1. Harvey, on or after Aug. 23, 2017,
    2. Irma, on or after Sept. 4, 2017,
    3. Maria, on or after Sept. 16, 2017
Allowance for penalty-free retirement plan funds withdrawal
  • Per § 72(p), a loan from a retirement plan is considered a distribution unless (among other things):
    1. the loan amount doesn't exceed the lesser of:
      i. $50,000, or
      ii. 1/2 the present value of the employee's nonforfeitable accrued benefit under the plan (or up to $10,000, even if more than the accrued benefit), and
    2. the loan terms require repayment within five years (with an exception for longer repayment of a personal residence plan loan)
  • Barring several specific conditions, early withdrawals (generally, before age 59 1/2) from a qualified retirement plan result in an additional tax of 10% of the amounts withdrawn that are includable in gross income, per § 72(t)
  • Provides flexibility for loans from retirement plans for qualified hurricane relief by increasing the maximum amount to $100,000 from $50,000, removing the 1/2 present value limitation and delaying certain repayment dates
  • Provides an exception to the 10% early retirement plan withdrawal penalty for qualifying hurricane relief distributions (any distribution from an eligible retirement plan made to an individual whose principal home is located in one of the three hurricane disaster areas and sustained an economic loss by reason of the hurricanes on or after the dates outlined above and before Jan. 1, 2019)
  • Allows for the re-contribution of certain retirement plan withdrawals for home purchases or construction which:
    1. were received after Feb. 28, 2017, and before Sept. 21, 2017, and
    2. the home purchase or construction was cancelled on account of one of the three hurricanes
  • Allows for taxpayers to re-contribute the amount at anytime over a three-year period. Also, taxpayers can opt out of the income inclusion from the withdraw over a three-year period. Both three-year periods begin the day after the withdrawal.
Suspension of limitations on deductibility of charitable contributions
  • Individual taxpayers can claim an itemized deduction for charitable contributions in an amount up to 50, 30 or 20% of AGI, depending on the type of property contributed and the type of donee, per § 170(b)(1)
  • Corporate taxpayers generally can deduct charitable contributions up to 10% of taxable income per § 170(b)(2)
  • Amounts in excess of the above thresholds can be carried forward by both individuals and corporations for five years, subject to various limitations and ordering rules per § 170(d)
  • Temporarily suspends the percentage limitations imposed by § 170(b) on "qualified contributions," defined as cash contributions made to qualifying organizations under § 170(b)(1)(A) made during the period beginning Aug. 23, 2017, and ending Dec. 31, 2017, for relief efforts in one of the three hurricane disaster areas
    1. for individuals, qualified contributions are limited instead to the excess of AGI over the amount of all other deductible contributions
    2. for corporations, they are limited to the excess of taxable income over the amount of all other deductible contributions
  • Provides that qualified contributions will not be taken into account in applying the limitations under §§ 170(b) and (d) to other deductible contributions
  • Relaxes the limitations on the deductibility of carryover qualified contributions during the five-year period
  • Exempts qualified contributions from the overall limitation on itemized deductions under § 68
  • Qualified contributions must also be substantiated, with a contemporaneous written acknowledgement 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
Employee retention tax credit for employers
§ 38 allows for the combination of several business incentive credits into one general business credit (GBC), which is allowed against the taxpayer's income tax liability in a given tax year. It is equal to the sum of:
     a. the business credit carryforwards to the tax year,
     b. the amount of the current-year GBC, and
     c. the business credit carrybacks to the tax year
  • Provides for an employee retention credit for "eligible employers" affected by any one of the three hurricanes
  • "Eligible employers" broadly defined as having conducted an active trade or business in a disaster zone on the date of the disaster, which for some period of time after the disaster, was rendered inoperable
  • Credit would be treated as a GBC under § 38, and equal 40% of up to $6,000 of qualified wages with respect to each eligible employee for the tax year (an employee whose principal place of employment on the date of the disaster was an eligible employer)
Use of prior-year earned income to maximize the EITC and CTC
  • § 32 allows eligible individuals an EITC equal to the credit percentage of earned income (up to a ceiling amount) for the tax year. For 2017, the ceiling amounts are:
    1. $6,670 for taxpayers with no qualifying children,
    2. $10,000 for those with one qualifying child,
    3. $14,040 for those with two or more qualifying children
  • For EITC purposes, earned income includes wages, salaries, tips and other employee compensation, but only if these amounts are includable in gross income for the tax year; plus net earnings from self-employment less the self-employment tax deduction
  • § 24 allows individuals to claim a $1,000 CTC for each qualifying child they can claim as a dependent
  • The amount of the allowable CTC is reduced (but not below 0) by $50 for each $1,000 (or fraction thereof) of MAGI above:
    1. $110,000 for joint filers,
    2. $75,000 for unmarried individuals, and
    3. $55,000 for married taxpayers filing separately
  • To the extent the CTC exceeds the taxpayer's tax liability, the CTC is refundable in the amount 15% of earned income exceeds a certain threshold
  • For the purposes of the EITC and CTC, allows taxpayers who are qualifying individuals to use their earned income from the preceding tax year if it exceeds their current tax year, if the current year includes the applicable disaster date below
  • If the taxpayer elects to use their prior-year earned income, they must do so to calculate both credits
  • Qualified individuals are those whose principal places of abode were located in hurricane disaster zones on the following dates:
    1. Harvey - Aug. 23, 2017
    2. Irma - Sept. 4, 2017
    3. Maria - Sept. 16, 2017
  • In the case of joint filers, the above election may apply if either spouse is a qualified individual

 

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.