New Tax Rules on Disaster Relief
Wolters Kluwer Provides New Tax Relief Guidance on Federal Disasters in 2016 and 2017
(NEW YORK, NY, January 2018) — The year 2017 saw a number of major disasters, including Hurricanes Harvey, Irma and Maria and the California wildfires. Yet there were many more major disaster declarations by the federal government than one might expect. In 2016 and 2017, there were a total of 96 federal major disaster declarations. Disaster declarations are made on a state-by-state basis, so a hurricane that strikes multiple states can result in multiple disaster declarations. The chart below shows the number of federal major disaster declarations for 2016 and 2017.
“While both Congress and the IRS took initiative in 2017 to provide tax relief to disaster victims, it was not all good news,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting. “The Tax Cuts and Jobs Act enacted in 2017 eliminated casualty loss deductions for anything other than a federally-declared disaster.”
Disaster Tax Relief and Airport and Airway Extension Act of 2017
Enacted on September 29, 2017, the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Disaster Relief Act), provided tax relief for the recent victims of Hurricanes Harvey, Irma and Maria. The Disaster Relief Act permits distributions from retirement plans after the designated disaster date until January 1, 2019 of up to $100,000 free of the ten percent early distribution penalty. Tax on the distributions may be spread over three years, and the recipient may repay the funds to the plan within a three-year period.
Hardship distributions were also permitted from qualified employer plans, but the hardship distribution had to be made no later than January 31, 2018. Hardship distributions received before September 21, 2017 that could not be used for their intended purpose, could be repaid to the plans until February 28, 2018. Plan loans to qualified individuals that are due during a period ending on December 31, 2018 qualify for a one-year delay in repayment.
For the casualty loss deduction related to the three hurricanes under the Disaster Relief Act, the dollar limitation for each loss was increased from $100 to $500, the ten percent AGI threshold waived, and the taxpayer may elect to claim the casualty loss as an additional standard deduction. Existing law had also permitted the taxpayer to elect to claim the loss on a federally-declared disaster in the year prior to the year in which the loss occurred.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act, enacted on December 22, 2017, limited the itemized deduction for personal casualty losses to losses attributable to federally declared disasters after December 31, 2017 and before January 1, 2026. The legislation also, for a net disaster loss from a federally declared disaster in 2016 or 2017, increased the dollar limitation on the casualty loss deduction from $100 to $500 and waived the ten percent AGI threshold.
IRS Disaster Relief
The IRS issued a number of disaster relief notices delaying tax filing and payment requirements for victims of disasters. For the major hurricanes of 2017, those filings and payments were permitted to be delayed until January 31, 2018. For victims of California wildfires, flooding, mudflows and debris flows taking place between December 4, 2017 and April 30, 2018, filing and payment requirements are permitted to be delayed until April 30, 2018. In Rev. Proc. 2018-08 and 2018-09, the IRS provided a number of safe harbor calculations to assist taxpayers in determining the amount of their casualty loss.