Congress provides relief for 2018 and 2019 disasters
New law provides relief with certain tax benefits for taxpayers affected by 2018 and 2019 disasters.
Congress has passed both the Further Consolidated Appropriations Act, 2020 (HR 1865) and the Consolidated Appropriations Act, 2020 (HR 1158). Together, the Acts provide for funding of the federal government through the end of fiscal year 2020 (September 30, 2020). HR 1865 includes the Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
The Taxpayer Certainty and Disaster Tax Relief Act extends certain expired and expiring tax provisions through 2020, provides additional disaster relief, and makes other tax law changes.
The SECURE Act modifies rules for retirement plan participants as well as plans themselves and employers that sponsor plans. Most changes are effective beginning in tax year 2020 (TS21).
Finally, HR 1865 repeals certain Affordable Care Act (ACA) provisions.
The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act) provides disaster tax benefits for individuals and businesses affected by presidentially-declared disasters. This relief is similar to the benefits provided by the:
- Disaster Tax Relief and Airport and Airway Extension Act of 2017 to victims of Hurricanes Harvey, Irma and Maria, and
- Bipartisan Budget Act of 2018 to victims of California wildfires.
The potential disaster-related benefits under the Act include:
- Retirement plan and IRA provisions
- Penalty-free distributions
- Three-year period for repayment and income inclusion
- Recontributions of withdrawals for home purchases
- Increased loan limit from qualified plans and delayed repayment rules
- Employee retention credit
- Charitable contributions
- Qualified disaster-related personal casualty losses
- EITC and ACTC earned income look-back election
- Automatic extensions of filing deadlines
Qualified disaster area and qualified disaster zone
A qualified disaster area is an area declared a major disaster area by the President. To qualify, the incident period for the disaster must begin before December 20, 2019 and be declared during the period January 1, 2018 through February 18, 2020 (60 days after the enactment date). Incident period means the period specified by FEMA as the period during which the disaster occurred.
Under these definitions, some California wildfires could possibly qualify for relief under this definition as well as under the previous relief provided by the Bipartisan Budget Relief Act of 2018. However, to prevent double benefit, the Act prevents these wildfires from being included in the current definition.
To qualify for certain individual or public assistance, the affected area must be in a qualified disaster zone. Qualified disaster zones include the portion of any disaster area determined to warrant individual or public assistance. Some tax benefits apply only to disaster zones, i.e. the core or hardest hit parts of disaster areas. FEMA maps delineate which areas are disaster zones, i.e. qualify for individual assistance or a combination of individual and public assistance. To find a FEMA map for a disaster, follow these instructions:
- Go to https://www.fema.gov/disasters
- Under “Declaration Type” select “Major Disaster Declaration”
- Filter by State/Tribal Government and/or date, if desired
- Click “Apply”
Qualified disaster-related personal casualty losses
Generally, disaster area casualty losses (i.e., losses of nonbusiness property in a disaster area) are reduced by a $100 per casualty “floor” and a 10% of AGI limitation. The are available only for taxpayers who itemize deductions on Schedule A.
Under the new law:
- The 10% of AGI limitation is waived for net disaster losses.
- The $100 floor is increased to $500.
- The net disaster loss may be added to the standard deduction for taxpayers who do not itemize.
A net disaster loss is defined as the excess of qualified disaster-related personal casualty losses over personal casualty gains. A qualified disaster-related personal casualty loss is a loss arising on or after the first day of the incident period to which the area relates, that is attributable to the qualified disaster.
Example: Catherine sustained a personal casualty loss of $6,000 due to a qualified disaster. Her itemized deductions (other than the casualty loss) total only $3,000. Without the disaster relief provision, it would not be worthwhile for her to claim the loss because her itemized deductions do not exceed her standard deduction. Under the new law, Catherine may add $5,500 ($6,000 less the $500 floor) to her standard deduction.
Note: A qualified disaster-related casualty loss claimed as an additional standard deduction is allowed for AMT.
Retirement plan and IRA provisions
Penalty-free distributions. Taxpayers may take penalty-free distributions up to $100,000 from IRAs and eligible retirement plans. The limit applies on the aggregate to all qualified disaster distributions for the same disaster combined, including those from prior years. However, if a taxpayer happened to be in two separate disasters, the taxpayer could apply a separate $100,000 limit to each disaster.
Taxpayers qualify if:
- Their principal place of abode at any time during the incident period of the qualified disaster is located in the qualified disaster area and they sustain an economic loss by reason of the disaster.
- The distribution is a qualified disaster distribution – one made on or after the first day of the incident period of a qualified disaster and before June 17, 2020 (180 days after date of enactment).
Three-year period for repayment and income inclusion. Unless the taxpayer elects otherwise, tax on qualified disaster distributions will be spread over three years beginning with the year the distribution is made. Also, in the three-year period beginning on the distribution date, taxpayers may repay amounts that were distributed and thus avoid taxation on the distributed amount(s).
Recontributions of withdrawals to make home purchases. Taxpayers who received first-time homebuyer distributions from IRAs or hardship distributions from retirement plans to acquire or construct a principal residence in a qualified disaster area but were unable to purchase or construct a principal residence because of the disaster, may recontribute the distribution without tax or penalty consequences. The distribution must have been made during the period beginning on date that is 180 days before the first day of the incident period of the qualified disaster and ending on the date that is 30 days after the last day of the incident period. The applicable period for contributing back to the plan means the period beginning on the first day of the incident period of the qualified disaster and ending on June 17, 2020.
Retirement plan loans. The retirement plan loan maximum is increased from $50,000 to $100,000, or the present value of the employee’s non-forfeitable accrued benefit under the plan. Additionally, if the due date for any repayment of the loan occurs during the period beginning on the first day of the incident period of the qualified disaster and ending on the date which is 180 days after the last incident period, the due date is delayed for one year (or if later, June 17, 2020). A qualified individual is one whose principal place of abode is located in the qualified disaster area with respect to the qualified disaster, who sustains an economic loss because of the qualified disaster.
Employee retention credit for 2018 and 2019 qualified disasters
An employee retention credit is available to eligible employers affected by one of the qualified disasters. The credit is a business credit equal to 40% of up to $6,000 of qualified wages (maximum credit $2,400) per eligible employee.
An eligible employer is one that conducted an active trade or business in a qualified disaster zone at any time during the incident period of the qualified disaster with respect to the qualified disaster zone, and the active trade or business was rendered inoperable at any time during the period beginning on the first day of the incident period of the qualified disaster and ending on December 20, 2019, as a result of damage sustained by reason of the disaster.
An eligible employee is an employee whose principal place of employment with the eligible employer was in the qualified disaster zone.
Qualified wages means wages paid or incurred:
- by any eligible employer,
- with respect to an eligible employee,
- at any time on or after the date on which the first trade or business first became inoperable at the principal place of employment of the employee, and
- before the earlier of the date on which the trade or business has resumed significant operations at such principal place of employment, or the date which is 150 days after the last day of the incident period of the qualified disaster.
The 60% AGI limit for cash contributions is waived for individuals who make qualified contributions for qualified disaster areas.
However, taxpayers are not allowed to deduct amounts that exceed their AGI (computed without regard to any net operating loss carrybacks). If they reach the AGI limit, taxpayers can carryover the charitable contribution to a subsequent year.
A qualified contribution is any contribution paid during the period beginning on January 1, 2018 and ending on Feberuary 18, 2020, in cash, to a qualified charitable organization for relief efforts in one or more qualified disaster areas.
The taxpayer must obtain contemporaneous written acknowledgement from the organization that the contribution was used or will be used for disaster relief efforts in the qualified disaster area. Contributions to supporting organizations and donor advised funds are not eligible for the special treatment.
EITC and ACTC earned income look-back election
If a taxpayer’s earned income for the year is less than the earned income for the preceding year, then a taxpayer may elect to use their prior year earned income to calculate the EITC and additional child tax credit (ACTC).
A qualified individual is one whose principal place of abode at any time during the incident period of any qualified disaster was located:
- in the qualified disaster zone with respect to the disaster, or
- in the qualified disaster area with respect to the qualified disaster (but outside the qualified disaster zone with respect to the qualified disaster) and the taxpayer was displaced from that home because of the disaster.
For taxpayers in the qualified disaster zone, the election can be made for any tax year which includes a portion of the incident period. For taxpayers living outside the zone but displaced by the disaster, the election includes the year of the displacement.
If an election is made, it must be made for both the EITC and the ACTC. If it is not clear whether the election is beneficial, compute the tax liability with and without the election and make the election only if it results in a higher credit for the EITC and ACTC combined.
For taxpayers using the married filing joint filing status, the election may be made if either spouse is qualified to make the election and the earned income of both spouses in the prior year will be used.
Automatic extensions of filing deadlines
The Act provides for a mandatory 60-day extension of filing deadlines. The mandatory extension begins on the earliest incident specified in the disaster area declaration and ends on the date that is 60 days after the latest incident date.
A qualified taxpayer is:
- Any individual whose principal residence is located in a disaster area,
- Any taxpayer whose principal place of business (other than the business of performing services as an employee) is located in a disaster area,
- Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a disaster area,
- Any taxpayer whose records necessary to meet a filing deadline are maintained in a disaster area,
- Any individual visiting a disaster area who was killed or injured as a result of the disaster, and
- Solely with respect to joint returns, any spouse of an individual described above.
For this purpose, disaster area is any federally declared disaster determined by the President to warrant individual or public assistance.
The extended deadline will also apply to the deadline for making contributions to IRAs, as well as correcting contributions, recharacterizing contributions, and making rollovers.
If the IRS provides filing relief, the mandatory 60-day extension will run in addition to, or concurrent with, the additional time specified by the IRS.
The deadline extension rules will apply to all federally declared disasters declared after December 20, 2019.
Originally published in the 12/26/19 special edition of TAX in the News