Hurricane relief enacted

Editor: Sally P. Schreiber, J.D.   President Donald Trump on Sept. 29 signed into law an act providing tax relief to victims of Hurricanes Harvey, Irma, and Maria. The Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63, allows eligible taxpayers to make tax-favored withdrawals from qualified plans, eases the casualty loss rules, provides an employee retention credit for employers, and loosens the rules for claiming the earned income tax credit and child tax credit. The act also extended various aviation taxes through March 31, 2018.

The act defines three disaster zones and disaster areas by reference to the areas that the president declared to be disaster zones or disaster areas after Hurricanes Harvey, Irma, and Maria.

Qualified plans

Qualified hurricane distributions: The act provides that the 10% additional tax imposed by Sec. 72(t) on early distributions from a qualified retirement plan will not apply to any “qualified hurricane distribution.” A qualified hurricane distribution is any distribution (up to $100,000) from a plan described in Sec. 402(c)(8)(B) made to a “qualified individual” during prescribed periods. A “qualified Hurricane Harvey individual” is an individual whose principal place of abode on Aug. 23, 2017, was in the Hurricane Harvey disaster area and who sustained an economic loss by reason of Hurricane Harvey. A “qualified Hurricane Irma individual” is an individual whose principal place of abode on Sept. 4, 2017, was in the Hurricane Irma disaster area and who sustained an economic loss by reason of Hurricane Irma. A “qualified Hurricane Maria individual” is an individual whose principal place of abode on Sept. 16, 2017, was in the Hurricane Maria disaster area and who sustained an economic loss by reason of Hurricane Maria.

Qualified hurricane distributions can be made:

• To qualified Hurricane Harvey individuals on or after Aug. 23, 2017, and before Jan. 1, 2019;
• To qualified Hurricane Irma individuals on or after Sept. 4, 2017, and before Jan. 1, 2019; and
• To qualified Hurricane Maria individuals on or after Sept. 16, 2017, and before Jan. 1, 2019.

In addition to relief from the Sec. 72(t) penalty, the act allows eligible taxpayers to spread out any income inclusion resulting from those distributions over a three-year period, beginning with the tax year the distribution is required to be included in income. The distributions are also exempt from the trustee-to-trustee transfer and withholding rules.

Repayments: Taxpayers who receive qualified hurricane distributions can repay them into a qualified plan (other than an individual retirement account (IRA)) within three years of the distribution, and the repayment will be treated as an eligible rollover distribution. Repayments to IRAs will be treated as transfers from an eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution.

Similarly, taxpayers who made withdrawals from qualified plans after Feb. 28, 2017, and before Sept. 21, 2017, in order to purchase or construct a residence within one of the hurricane disaster areas, and whose purchase or construction was canceled because of one of the hurricanes, can repay that distribution on or before Feb. 28, 2018.

Loans: The act also increases the limit on the amount of a loan from a qualified employer plan that will not be treated as a distribution, from $50,000 to $100,000. This increase applies to loans made on or after Sept. 29, 2017, through Dec. 31, 2018. The act also removes the Sec. 72(p)(2)(A)(ii) “one half of present value” limitation for these loans and allows for a longer repayment period.

Employee retention tax credit

The act provides eligible employers with an employee retention tax credit. Eligible employers are employers that conducted an active trade or business on Aug. 23, 2017, in the Hurricane Harvey disaster zone; on Sept. 4, 2017, in the Hurricane Irma disaster zone; or on Sept. 16, 2017, in the Hurricane Maria disaster zone, and that trade or business was rendered inoperable on any day after those dates and before Jan. 1, 2018, as a result of whichever hurricane hit that employer’s area.

The credit equals 40% of up to $6,000 (a maximum of $2,400) in “qualified wages” paid to an eligible employee by an eligible employer. An eligible employee is one who worked for the eligible employer on the relevant date listed above for each hurricane in the relevant disaster zone. Qualified wages are wages paid on any day after the specified dates listed above and before Jan. 1, 2018, while the eligible employer’s business is inoperable.

Charitable contribution limit

For charitable contributions made in cash between Aug. 23, 2017, and Dec. 31, 2017, to a Sec. 170 charitable organization for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas, the act temporarily suspends the percentage limitations in Sec. 170(b) and provides that those contributions will not be taken into account for purposes of applying Sec. 170(b) or the Sec. 170(d) carryover rules to other contributions. The act also temporarily loosens the rules regarding excess contributions and makes an exception to the overall limitation on itemized deductions for qualified contributions.

Casualty losses

The act eases the rules for casualty losses for taxpayers who suffer a “net disaster loss” as a result of one of the hurricanes. A “net disaster loss” is the excess of the taxpayer’s “qualified disaster-related personal casualty losses” over the taxpayer’s personal casualty gains (as defined in Sec. 165(h)(3)(A)).

A “qualified disaster-related personal casualty loss” is a casualty loss that arises on or after Aug. 23, 2017, in the Hurricane Harvey disaster area and is attributable to Hurricane Harvey; on or after Sept. 4, 2017, in the Hurricane Irma disaster area and is attributable to Hurricane Irma; or on or after Sept. 16, 2017, in the Hurricane Maria disaster area and is attributable to Hurricane Maria.

For qualified disaster-related personal casualty losses, the act removes the requirement that personal casualty losses must exceed 10% of the taxpayer’s adjusted gross income to be deductible. It also allows nonitemizers to increase their standard deduction by the amount of their net disaster loss. And, although the standard deduction is disallowed for alternative minimum tax (AMT) purposes, taxpayers subject to the AMT can claim the portion of their standard deduction that is attributable to their net disaster loss for AMT purposes.

The act also increases the Sec. 165(h)(1) $100 per-casualty floor to $500 for qualified disaster-related personal casualty losses.

Earned income and child tax credits

The act allows qualified individuals to elect to use their prior-year earned income, instead of their current-year income, for purposes of the Sec. 32 earned income tax credit and the Sec. 24 child tax credit, if their current-year income is less than their prior-year income.

A qualified individual is a person whose principal place of abode was in the Hurricane Harvey disaster zone on Aug. 23, 2017, or whose principal place of abode was in the Hurricane Harvey disaster area (but outside the Hurricane Harvey disaster zone) on that date and the individual was displaced from his or her principal place of abode by reason of Hurricane Harvey; in the Hurricane Irma disaster zone on Sept. 4, 2017; or in the Hurricane Irma disaster area (but outside the Hurricane Irma disaster zone) on that date and the individual was displaced from his or her principal place of abode by reason of Hurricane Irma; or in the Hurricane Maria disaster zone on Sept. 16, 2017, or in the Hurricane Maria disaster area (but outside the Hurricane Maria disaster zone) on that date and the individual was displaced from his or her principal place of abode by reason of Hurricane Maria.