Special tax relief for victims of Hurricanes Harvey, Irma and Maria was enacted into law in the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823). Section V of the Act, which also reauthorized Airport and Airway Trust Fund, contains the provisions related to Hurricane Relief. The bill was signed into law by President Trump on September 29, 2017.
The provisions offer relief targeted specifically to the three hurricanes rather than making broader revisions to the law. Thus, unless indicated in the bulleted list, the provisions are limited to those living in the affected declared disaster areas.
Specific provisions included are:
- Qualified Hurricane Distributions – A maximum of $100,000 may be distributed to affected employees from a qualified retirement plan or IRA and treated as a qualified hurricane distribution. A qualified plan recipient will be allowed to avoid tax on the distribution if the amount is repaid to the plan within 3 years, with the payment treated as a qualified rollover. As well, the plan distribution will be treated as exempt from withholding. That is, it won’t be treated as an eligible rollover distribution for withholding purposes despite being eligible for an extended rollover period. For an IRA recipient the same 3 year rule will apply, except that the repayment shall be treated as if it were a trustee to trustee transfer (what the 1099R calls a “direct rollover”). [Act Section 502(a)]
- Recontribution of Withdrawals for Home Purchases – Individuals who made certain withdrawals for home purchases in the affected areas may recontribute such funds during the period from August 23, 2017 through February 28, 2018 and have the amounts treated as a tax free rollover. The distribution must have been made under a special provision related to the home purchase (IRC §§401(k)(2)(B)(i)(IV), 403(b)(7)(A)(ii) (but only to the extent such distribution relates to financial hardship), 403(b)(11)(B), or 72(t)(2)(F)) after February 28, 2017 and before September 21, 2017 which was to be used to purchase or construct a residence in one of the affected areas but which was not purchased due to the hurricane. [Act Section 502(b)]
- Liberalized Qualified Plan Loan Rules – The maximum amount that an employee may borrow from an employer plan is temporarily increased to $100,000 from $50,000 and the maximum percentage of the employee’s vested interest that may be borrowed is increased to 100% from 50% for a qualified loan. For loans made after the qualified beginning date (which is different for each hurricane) and before December 31, 2018, the due date for repayments of these loans will be delayed by one year. [Act 502(c)]
- Plan Amendment Relief – The law contains provisions that will allow plans to be operated as if amendments necessary to implement these rules had been in place if the amendments are adopted by the plan by a date to be specified by the IRS. [Act 502(d)]
- Employee Retention Credit – The law creates a credit of 40% of wages paid to qualified employees (capped at $6,000, for a maximum credit of $2,400). To be eligible for the credit, an employer must have conducted an active trade or business in a hurricane zone and the business must have been inoperable for at least one day after the hurricane and prior to January 1, 2018 due to the hurricane. The wages must be paid to an employee of the employer whose principal place of employment when the hurricane hit was with the employer. The wages must be paid during the period the business was inoperable. [Act Section 503]
- Suspension of Charitable Contribution Limits – The percentage limits for both individuals and corporations are increased to 100% for “qualified contributions” related to the hurricanes, and the such contributions will not be treated as itemized deductions. This special provision applies to all taxpayers, not just those living in the hurricane areas. In order to be a “qualified contribution” the following conditions must be met:
- The contribution is paid during the period beginning on August 23, 2017, and ending on December 31, 2017, in cash to charitable organization,
- The contribution is made for relief efforts in the Hurricane Harvey disaster area, the Hurricane Irma disaster area, or the Hurricane Maria disaster area,
- The taxpayer obtains from such organization contemporaneous written acknowledgment that such contribution was used (or is to be used) for qualified hurricane relief efforts and
- The taxpayer has elected the application of this provision with respect to such contribution.
- Is not made to:
- A private foundation described in IRC §509(a)(3) or
- For the establishment of a new, or maintenance of an existing donor advised fund. [Act Section 504(a)]
- Disaster Related Casualty Losses – The 10% floor for individual casualty losses related to damage from one of the specified hurricanes for those in affected zones will be removed, though the $100 per incident floor will be raised to $500. Such personal casualty losses will also be deductible for purposes of the alternative minimum tax. The loss will also serve to increase a taxpayer’s standard deduction for the year if the taxpayer does not itemize deductions. [Act Section 504(b)]
- Special Rule for Determining Earned Income – A special relief provision applies to individuals in the affected areas in computing the refundable tax credit and earned income credit if their earned income is decreased for the year due to the impact of the hurricanes. The individual may elect to use either the current year’s earned income or that of the prior year (if greater) in computing those credits. [Act Section 504(c)]