On September 29, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Disaster Act) into law. The legislation includes several new tax breaks for Hurricane Harvey, Irma, and Maria victims and a few tax breaks for everybody. Unless you or your business was directly affected by one of these hurricanes, the changes in the rules for charitable efforts will probably be of the most interest to you. This letter summarizes what we think are the key points in the Disaster Act.
Suspension of Charitable Deduction Percentage Limitation. The amount of charitable donations that an individual can deduct in any year is limited to a percentage of your Adjusted Gross Income (AGI). In general, cash donations to IRS-approved public charities cannot exceed 50% of your AGI. Any excess donations can be carried forward for up to five years. Under the Disaster Act, you can elect to deduct qualified contributions that equal up to 100% of your 2017 AGI when combined with other garden-variety donations. A qualified contribution is generally defined as a cash charitable donation made between 8/23/17 and 12/31/17 to a public charity for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas. To claim this break, you must receive contemporaneous written acknowledgement from the charity stating that the contribution was (or is to be) used for such efforts. This break is available to all individual taxpayers regardless of their location.
Suspension of Charitable Deduction Phaseout Rule. For 2017, your itemized deductions (other than any writeoffs for medical expenses; investment interest; and casualty, theft, and wagering losses) are reduced by 3% of your AGI in excess of $313,800 for married filing joint, $261,500 for single, $287,650 for head of household and $156,900 for married filing separately. The Disaster Act suspends this unfavorable deduction phaseout rule for qualified contributions (as defined above). This means your qualified contributions can generally be deducted—without any reduction under the phaseout rule—up to the point where 100% of your AGI is offset by charitable donations. This break is available to all individual taxpayers regardless of their location.
Liberalized Charitable Deduction Rules for Cash Donations by C Corporations. In general, charitable contributions are not deductible by a C corporation to the extent they exceed 10% of corporate taxable income. Under the Disaster Act, a C corporation can elect to deduct “qualified contributions” (defined above) of up to 100% of taxable income reduced by other allowable charitable contributions. To claim this break, the corporation must receive contemporaneous written acknowledgement from the charity stating that the contribution was (or is to be) used for such efforts. This break is available to all C corporation taxpayers regardless of their location.
Special Relief Provisions for Personal Casualty Losses. Individuals who itemize their deductions can deduct a limited amount of uncompensated personal casualty losses. Generally, the casualty loss (reduced by applicable insurance proceeds) must first be reduced by $100 per casualty event and then by 10% of your AGI. So, your uncompensated personal casualty loss is deductible only to the extent it exceeds 10% of your AGI, plus $100. The Disaster Act provides special relief provisions for qualified disaster-related personal losses—hurricane-related losses that arose in: (1) the Hurricane Harvey disaster area after 8/22/17, (2) the Hurricane Irma disaster area after 9/3/17, or (3) the Hurricane Maria disaster area after 9/15/17. For those losses, the Disaster Act increases the $100 reduction amount to $500, but it also waives the normal 10%-of-AGI floor. This means these qualified losses are deductible to the extent they exceed $500. You can also deduct the qualified losses even if you don’t itemize or are subject to alternative minimum tax.
Special Relief Provisions for Qualified Hurricane Distributions. The Disaster Act provides a number of relief provisions for qualified hurricane distributions. For this purpose, a qualified hurricane distribution is a distribution from tax-favored retirement plans, including IRAs, made—(1) after 8/22/17 and before 1/1/19 to an individual whose principal place of abode on 8/23/17 was in the Hurricane Harvey disaster area and who sustained economic loss due to Harvey, (2) after 9/3/17 and before 1/1/19 to an individual whose principal place of abode on 9/4/17 was in the Hurricane Irma disaster area and who sustained economic loss due to Irma, or (3) after 9/15/17 and before 1/1/19 to an individual whose principal place of abode on 9/16/17 was in the Hurricane Maria disaster area and who sustained economic loss due to Maria.
The Disaster Act provides the following relief for qualified hurricane distributions:
1. Penalty-free Treatment. Up to $100,000 of qualified hurricane distributions are exempt from the premature withdrawal penalty that applies to most retirement account withdrawals taken before age 59½.
2. Three-year Recontribution Period. Qualified hurricane distributions can be recontributed to eligible retirement plans and IRAs tax-free. This amounts to tax-free rollover treatment, and you can arrange for this beneficial result any time during the three-year period after you receive a qualified distribution.
3. Three-year Income Averaging. A qualified hurricane distribution that is not recontributed (see item 2 above) is taken into the recipient taxpayer’s gross income ratably over three years—beginning with the year in which the distribution is received.
Tax-free Recontributions for Canceled Home Purchases. Any individual who took out a “qualified distribution” to buy or build a home can roll the money back into an eligible retirement plan (including an IRA) between 8/23/17 and 2/28/18 with no tax harm done. In other words, tax-free rollover treatment will apply to such recontributed amounts. A qualified distribution for this purpose means a hardship distribution from a qualified retirement plan or a qualified first-time homebuyer distribution from an IRA that was: (1) received after 2/28/17 and before 9/21/17 and (2) intended for the purchase or construction of a principal residence within the Hurricane Harvey, Irma, or Maria disaster areas that didn’t take place due to Harvey, Irma, or Maria.
Larger Retirement Plan Loans Allowed. The Disaster Act generally increases the amount that can be taken out as a tax-free loan from a qualified retirement plan to the lesser of $100,000 or your vested account balance. This special rule applies to plan loans made to any “qualified individual” beginning on 9/29/17 and ending on 12/31/18. Under the normal rules, plan loans generally cannot exceed $50,000 or half of your vested account balance. A qualified individual for this purpose is any person whose principal place of abode: (1) on 8/23/17 was in the Hurricane Harvey disaster area and who sustained economic loss due to Harvey, (2) on 9/4/17 was in the Hurricane Irma disaster area and who sustained economic loss due to Irma, or (3) on 9/16/17 was in the Hurricane Maria disaster area and who sustained economic loss due to Maria.
Retirement Plan Loan Repayments Can Be Delayed. In general, retirement plan loans must be repaid within five years to be tax-free (home loans can have longer terms). The Disaster Act offers relief to any “qualified individual” (as defined above) who has a plan loan outstanding on or after the “qualified beginning date” with repayment that is otherwise due between the qualified beginning date and 12/31/18. The due date can be delayed for one year, and subsequent loan repayments will be adjusted to reflect the delay. Qualified beginning dates are — 8/23/17 for a qualified Hurricane Harvey individual, 9/4/17 for a qualified Hurricane Irma individual, and 9/16/17 for a qualified Hurricane Maria individual.
New Employee Retention Credit. This new credit of up to $2,400 per employee is intended to encourage employers affected by Hurricanes Harvey, Irma, or Maria to retain and continue paying their employees until the end of this year. Contact us for details.
Conclusion. As we promised, the Disaster Act contains something for just about everyone. This letter only scratches the surface of all the new rules. Please call us if you have questions or want more information.