President Trump recently signed into law the Disaster Tax Relief Act of 2017 (the “Act”), providing assistance to those taxpayers impacted by Hurricanes Harvey, Irma and Maria. Among other things, the new law makes it easier for taxpayers to deduct hurricane-related casualty losses, access retirement funds without penalty and deduct charitable contributions made for hurricane relief efforts.
For casualty losses in excess of $500, the Act alters the existing rules by eliminating the requirement that such losses must exceed 10% of adjusted gross income in order to be deductible; further, the deduction is available regardless of whether taxpayers itemize deductions or are subject to the Alternative Minimum Tax. Finally, casualty losses generally are deductible in the taxable year in which the loss occurs (here, 2017); however, under the Act, taxpayers may opt to claim the deduction on a 2016 return (either an original return or an amended return).
The Act also creates an exception to the rule that early distributions (prior to age 59 ½) from an IRA or qualified retirement plan are subject to a 10% early withdrawal penalty, so long as the taxpayer suffered economic loss and the taxpayer’s principal abode is within a hurricane disaster area. Taxpayers may withdraw up to $100,000 provided that the withdrawal is made prior to January 1, 2019. Additionally, taxpayers may recontribute the withdrawn funds to the qualified plan within 3 years. To the extent a taxpayer does not recontribute a portion of withdrawn funds, the amount of the distribution that is not contributed will be taxable to the taxpayer; that taxable income may be spread proportionately over a three year period, beginning with the year in which the distribution is received.
The law also changes the rules for charitable contributions made for hurricane relief efforts. Under existing law, the charitable deduction for donations made in a taxable year cannot exceed 50% of a taxpayer’s adjusted gross income (in the case of contributions of capital gain property, the limitation is reduced to 30% of adjusted gross income). The Act suspends these limitations and allows taxpayers to deduct up to 100% of adjusted gross income for charitable contributions made before December 31, 2017. The Act also exempts these deductions from the phaseout rules that apply to high-income taxpayers.