While many Americans are frustrated with Congress’ inaction, according to polls, lawmakers recently did get something done: a welcome package of tax relief for individuals and businesses affected by this fall’s intense storm season.
Congress passed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 in late September, and President Trump signed it into law on Sept. 29. In addition, the Internal Revenue Service, the Labor Department and the Pension Benefit Guaranty Corporation (PBGC) have all issued enforcement relief related to Hurricanes Harvey, Irma and Maria. So what kind of relief, exactly, can Americans expect?
The relief extends to individuals and businesses in impacted areas. According to the Federal Emergency Management Agency and the IRS, these include all of Florida and Georgia; certain counties in Texas; Puerto Rico and the U.S. Virgin Islands. Residents and business owners in these places would likely do well to talk to a tax professional to determine which of the law’s provisions affect them specifically, but here are the broad outlines.
First, the law loosens many of the requirements related to deducting personal casualty losses for people living in the affected areas. Under the normal income tax rules, individuals must first reduce any uninsured losses by $100, and then reduce the amount again by 10 percent of their adjusted gross income (AGI). (Businesses are allowed to deduct the full amount.) But for losses that arose in the disaster areas specified by the law, the 10 percent of AGI reduction is eliminated. Instead, individuals will just subtract a flat amount of $500. People in these areas also can deduct losses even if they don’t itemize their deductions or if they are subject to the alternative minimum tax (AMT).
Congress is also giving Americans affected by these storms easier access to their retirement funds. Usually, if you withdraw funds from an IRA or qualified retirement plan, such as a 401(k), before age 59 1/2, the withdrawal is subject to a 10 percent penalty. But qualified distributions to people in hurricane-affected areas, up to $100,000, are temporarily exempt. Such distributions must generally be taken by the end of 2018. Additionally, if individuals recontribute qualified distributions to their retirement accounts within three years of the withdrawal, the transaction will count as a tax-free rollover.
Some people may have unluckily withdrawn funds from their retirement plan to purchase a home in one of the hard-hit areas. Congress also offers some relief to this group. If a buyer took a distribution between March 1, 2017 and Sept. 20, 2017 in order to buy a principal residence in one of the specified disaster areas, and that sale or construction did not happen because of a storm, the individual can contribute all or part of that distribution back into their retirement plan as a tax-free rollover.
In an effort to reward disaster giving, both individuals and corporations that give to relief efforts in the Hurricane Harvey, Irma or Maria disaster areas can benefit from liberalized charitable deduction rules. Normally, deductions for donations to public charities cannot exceed 50 percent of AGI (or 30 percent of AGI for property that can produce a capital gain if sold). For corporations, deductible donations cannot exceed 10 percent of taxable income. The law permits qualified contributions to be deducted up to 100 percent of AGI for individuals or 100 percent of taxable income for corporations, and donations in excess of these thresholds may be carried forward for five years.
Hurricane victims can also substitute their 2016 earned income for the 2017 amount if the earlier year’s is higher. Doing so can result in higher earned-income tax credits or child tax credits.
Business owners, who may face more complicated situations in the wake of the storms, have much to appreciate in the relief legislation too. The law provides an “employee retention credit” for employers affected by the hurricanes, as long as they meet eligibility requirements. The credit equals 40 percent of up to $6,000 in “qualified wages” for each eligible employee living in a core disaster area; in other words, a maximum of $2,400 per worker.
If your business offers an eligible retirement plan, you should bear in mind the liberalized distribution requirements mentioned above, especially the $100,000 maximum, which is double the usual cap. Plans may also make hardship distributions to participants without the six-month contribution suspension that typically applies. Outstanding plan loans that were due during the period beginning on the designated disaster date and ending on Dec. 31, 2018 are delayed for one year, and should be adjusted accordingly. Plans that do not currently allow hardship distributions or loans may make amendments to allow for them, as long as such amendments are adopted on or before the last day of the first plan year beginning on or after Jan. 1, 2019. The IRS will also allow some leniency regarding procedural requirements, so long as the administrator makes a good-faith effort to comply and reasonably attempt to assemble the necessary documentation as soon as is practical.
Affected employers who offer defined benefit plans received an extension from the IRS for required minimum funding deadlines, to Jan. 31, 2018. The Labor Department has said it will not enforce late penalties for employee benefit plan filing requirements as long as affected employers act “reasonably, prudently and in the interest of employees.” And the PBGC will waive late premium payment penalties for due dates on or after the Disaster Dates as defined in the law.
The Labor Department has encouraged employers to make reasonable accommodations for failures to meet health plan deadlines because of Hurricanes Harvey and Irma. Employers should make an effort to prevent employees from losing benefits, reaching out to the Labor Department for support if necessary. And employers who must file Form 5500 will likely be glad to know the IRS has extended the filing deadlines for businesses in a disaster area.
While this is a broad overview, it provides a sense of the variety of relief measures Congress packed into this legislation. Lawmakers did well to try to ease tax and regulatory burdens on the individuals and business owners who have made it through some of the most severe storms of recent years and their aftermath.
Posted by Rebecca Pavese, CPA
Flooding in the Briar Forest area of Houston. Photo courtesy Revolution Messaging.
While many Americans are frustrated with Congress’ inaction, according to polls, lawmakers recently did get something done: a welcome package of tax relief for individuals and businesses affected by this fall’s intense storm season.
Congress passed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 in late September, and President Trump signed it into law on Sept. 29. In addition, the Internal Revenue Service, the Labor Department and the Pension Benefit Guaranty Corporation (PBGC) have all issued enforcement relief related to Hurricanes Harvey, Irma and Maria. So what kind of relief, exactly, can Americans expect?
The relief extends to individuals and businesses in impacted areas. According to the Federal Emergency Management Agency and the IRS, these include all of Florida and Georgia; certain counties in Texas; Puerto Rico and the U.S. Virgin Islands. Residents and business owners in these places would likely do well to talk to a tax professional to determine which of the law’s provisions affect them specifically, but here are the broad outlines.
First, the law loosens many of the requirements related to deducting personal casualty losses for people living in the affected areas. Under the normal income tax rules, individuals must first reduce any uninsured losses by $100, and then reduce the amount again by 10 percent of their adjusted gross income (AGI). (Businesses are allowed to deduct the full amount.) But for losses that arose in the disaster areas specified by the law, the 10 percent of AGI reduction is eliminated. Instead, individuals will just subtract a flat amount of $500. People in these areas also can deduct losses even if they don’t itemize their deductions or if they are subject to the alternative minimum tax (AMT).
Congress is also giving Americans affected by these storms easier access to their retirement funds. Usually, if you withdraw funds from an IRA or qualified retirement plan, such as a 401(k), before age 59 1/2, the withdrawal is subject to a 10 percent penalty. But qualified distributions to people in hurricane-affected areas, up to $100,000, are temporarily exempt. Such distributions must generally be taken by the end of 2018. Additionally, if individuals recontribute qualified distributions to their retirement accounts within three years of the withdrawal, the transaction will count as a tax-free rollover.
Some people may have unluckily withdrawn funds from their retirement plan to purchase a home in one of the hard-hit areas. Congress also offers some relief to this group. If a buyer took a distribution between March 1, 2017 and Sept. 20, 2017 in order to buy a principal residence in one of the specified disaster areas, and that sale or construction did not happen because of a storm, the individual can contribute all or part of that distribution back into their retirement plan as a tax-free rollover.
In an effort to reward disaster giving, both individuals and corporations that give to relief efforts in the Hurricane Harvey, Irma or Maria disaster areas can benefit from liberalized charitable deduction rules. Normally, deductions for donations to public charities cannot exceed 50 percent of AGI (or 30 percent of AGI for property that can produce a capital gain if sold). For corporations, deductible donations cannot exceed 10 percent of taxable income. The law permits qualified contributions to be deducted up to 100 percent of AGI for individuals or 100 percent of taxable income for corporations, and donations in excess of these thresholds may be carried forward for five years.
Hurricane victims can also substitute their 2016 earned income for the 2017 amount if the earlier year’s is higher. Doing so can result in higher earned-income tax credits or child tax credits.
Business owners, who may face more complicated situations in the wake of the storms, have much to appreciate in the relief legislation too. The law provides an “employee retention credit” for employers affected by the hurricanes, as long as they meet eligibility requirements. The credit equals 40 percent of up to $6,000 in “qualified wages” for each eligible employee living in a core disaster area; in other words, a maximum of $2,400 per worker.
If your business offers an eligible retirement plan, you should bear in mind the liberalized distribution requirements mentioned above, especially the $100,000 maximum, which is double the usual cap. Plans may also make hardship distributions to participants without the six-month contribution suspension that typically applies. Outstanding plan loans that were due during the period beginning on the designated disaster date and ending on Dec. 31, 2018 are delayed for one year, and should be adjusted accordingly. Plans that do not currently allow hardship distributions or loans may make amendments to allow for them, as long as such amendments are adopted on or before the last day of the first plan year beginning on or after Jan. 1, 2019. The IRS will also allow some leniency regarding procedural requirements, so long as the administrator makes a good-faith effort to comply and reasonably attempt to assemble the necessary documentation as soon as is practical.
Affected employers who offer defined benefit plans received an extension from the IRS for required minimum funding deadlines, to Jan. 31, 2018. The Labor Department has said it will not enforce late penalties for employee benefit plan filing requirements as long as affected employers act “reasonably, prudently and in the interest of employees.” And the PBGC will waive late premium payment penalties for due dates on or after the Disaster Dates as defined in the law.
The Labor Department has encouraged employers to make reasonable accommodations for failures to meet health plan deadlines because of Hurricanes Harvey and Irma. Employers should make an effort to prevent employees from losing benefits, reaching out to the Labor Department for support if necessary. And employers who must file Form 5500 will likely be glad to know the IRS has extended the filing deadlines for businesses in a disaster area.
While this is a broad overview, it provides a sense of the variety of relief measures Congress packed into this legislation. Lawmakers did well to try to ease tax and regulatory burdens on the individuals and business owners who have made it through some of the most severe storms of recent years and their aftermath.
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