Hurricanes Harvey, Irma and Maria Tax Relief for Individuals
In an effort to speed recovery to the devastated areas of Hurricanes Harvey, Irma and Maria, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Disaster Relief and FAA Act of 2017) on September 29, 2017. This letter highlights the tax relief included in the Disaster Relief and FAA Act of 2017 available to individuals impacted by the hurricanes. These provisions include adjustments to limitations and reductions on the personal casualty loss deduction, flexibility for the use of retirement funds, suspension of limitations on charitable contributions, and special rules for determining earned income for purposes of the child tax credit and the earned income credit.
Personal casualty losses. In general, casualty losses are taken as an itemized deduction subject to a $100 reduction per loss occurrence. The total annual deduction for all personal casualty and theft losses is further limited to that amount which exceeds 10 percent of the taxpayer’s adjusted gross income. However, the Disaster Relief and FAA Act of 2017 modifies the reduction to $500 per occurrence but eliminates the need to exceed 10 percent of adjusted gross income. In addition, for taxpayers who do not itemize, the standard deduction is increased by the amount of the disaster loss.
Special rules for the use of retirement funds. Many victims of the hurricanes may be able to access retirement funds without triggering the standard early withdrawal penalties.
- Tax favored withdrawals. An exception to the 10-percent early withdrawal penalty applies to qualified distributions from a qualified retirement or annuity plan, or an IRA. The qualified distribution may be included in income ratably over three years, or may be recontributed to an eligible retirement plan within three years. Qualified distributions include distributions made on or after the disaster date, and before January 1, 2019, to an individual whose principal residence is in the disaster area and who has sustained an economic loss by reason of the relevant hurricane. Such distributions are limited to $100,000.
- Recontributions of withdrawals for home purchases. Individuals who received certain distributions from qualified plans after February 28, 2017, and before September 21, 2017, which was intended to be used to purchase or construct a principal residence in the Hurricane Harvey, Irma or Maria disaster areas but could not do so because of the hurricane may recontribute the amount to the retirement plan. The recontribution of the distribution may be made without tax or penalty if it is recontributed between August 23, 2017 and February 28, 2018.
- Loans from qualified plans to individuals sustaining an economic loss. The Disaster Relief and FAA Act of 2017 provides an exception to the income inclusion rule for loans from a qualified employer plan if the loan is to an individual whose principal residence on the disaster date, is located in the disaster area and who has sustained an economic loss by reason of the hurricanes. The exception only applies to the extent that the loan (when added to the outstanding balance of all other loans to the participant from all plans maintained by the employer) does not exceed $100,000.
Special rule for determining earned income. Individuals whose principal residence was in a hurricane disaster area and who is displaced as a result may elect to calculate their refundable child tax credit and earned income credit for 2017 by using their earned income from the preceding tax year.
Charitable contributions. Individuals are allowed to elect to temporarily suspend for all “qualified contributions” the 50-percent contribution base limitation, and the limitation on overall itemized deductions. Qualified contributions means
- Any cash contribution made beginning on August 23, 2017, and ending on December 31, 2017;
- for relief effort in the Hurricanes Harvey, Irma, and Maria disaster areas; and
- for which the taxpayer has obtained contemporaneous written acknowledgement.
Recovering from a disaster of this magnitude takes time and there are many decisions to be made. We are here to help you. Please call our office to discuss how this tax relief may benefit you.Tags: casualty loss, disaster tax relief, hurricane harvey, hurricane irma, hurricane maria, retirement loans, tax relief
Categorized in: Individual Tax, IRS News
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