Following the devastation left from Hurricanes Harvey, Irma and Maria, the Disaster Tax Relief and Airport and Airway Extension Act of 2017 was recently signed into law. The bill provides relief, in addition to the already extended tax deadlines provided for victims, by easing restrictions on claiming casualty losses, retirement plan loans, charitable deduction thresholds and earned income to qualify for the Earned Income Tax Credit and Child Tax Credit.
If you were a victim or have clients who were victims of Hurricane Harvey, Irma or Maria, here is a breakdown of some of the 2017 tax relief provided by the Act:
Eased Casualty Loss Rules
- Relief available if you don’t itemize: Typically, taxpayers have to itemize their deductions in order to claim casualty losses, but victims of Hurricane Harvey, Irma and Maria do not have to itemize in order to claim their disaster loss.
- 10 percent limitation is removed: If you are claiming a disaster loss, the law eliminates the requirement that personal casualty loss must exceed 10 percent of your adjusted gross income.
Note: If you are an individual or business who suffered uninsured or unreimbursed disaster-related casualty losses, you can choose to claim them on either the tax return for the year the loss occurred (in this instance, the 2017 return filed in 2018), or the loss can be deducted on the tax return for the prior year (2016). That means if you were on extension for 2016, you may be able to claim your casualty losses on your 2016 extended tax return.
Eased Access to Retirement Funds
- Increased amount can be borrowed from employer plans: Hurricane victims in need of a retirement plan loan can borrow up to $100,000 from their qualified employer plan.
- Penalty relief: Qualified hurricane distributions will not be subject to the 10 percent early retirement plan withdrawal penalty.
- Re-contribution of retirement withdrawals for cancelled home purchases: Taxpayers who cancelled home purchases as a result of the hurricanes can re-contribute retirement plan withdrawals for home purchases or construction and avoid tax on the plan withdrawal as long as the re-contribution is made by Feb. 28, 2018.
Special Rule for Earned Income Tax Credit and the Child Tax Credit
- Allows taxpayers to use lower income to qualify for credits: Taxpayers can use income from 2016 instead of 2017, if it is lower, to qualify for the Earned Income Tax Credit and the Child Tax Credit.
- Limitations Suspended: Taxpayers who make donations for qualified hurricane relief will not be subject to charitable contribution limitations if contributions are made before Dec. 31, 2017.
Hurricanes and natural disasters can be devastating for individuals and businesses impacted. You can’t replace personal items lost, but hopefully these tax breaks will provide some relief when filing 2017 tax returns.