Disaster Relief Tax Law Provisions

 

There are questions about the status of casualty losses and other tax return implications due to the 2017 hurricanes and fires. In summary, there are still many open items that have been discussed with IRS SPEC and we are awaiting IRS guidance.

Legislation (PL 115-63) provides targeted tax relief for taxpayers impacted by Hurricanes Harvey, Irma and Maria and the IRS recently issued Revenue Procedures 2018-08 (covers all federally declared disasters) and 2018-09 (covers 2017 hurricanes only) which provide simpler methods that individual taxpayers in those areas may use to determine the amount of their casualty losses for their homes and personal belongings.

At this point, IRS SPEC has not changed the scope provisions regarding casualty losses – they are still out of scope for us. If there is a decision by the IRS to permit Tax-Aide volunteers to include casualty losses for impacted taxpayers, we would have the challenge of developing and providing adequate training so that the taxpayers are properly served.

Most of the provisions in the legislation and the Revenue Procedures do not apply to us if casualty losses continue out of scope. However, there are provisions in the hurricane relief bill which could apply to some of the taxpayers we serve, but the IRS has not announced implementation steps for these provisions and all will presumably require TaxSlayer software changes. These provisions include:

• Allows taxpayers in the hurricane disaster areas who stopped earning income due the hurricanes to use earned income from the immediately preceding years for the earned income tax credit and the child tax credit. Will need to know which taxpayers qualify, their earned income for the preceding year and how to enter it in the software.

• Removes, for all taxpayers who itemize and who make qualified hurricane relief donations before December 31, 2017, the normal general limit that contributions to charitable organizations cannot exceed 50% of adjusted gross income. Will need a way to identify those contributions and a way for the software to ignore the normal limit for them.

• Suspends the 10% additional tax on early distributions from retirement plans for up to $100,000 in distributions made on or after August 23, 2017 and before January 1, 2019 if the distributions were made to an individual: (1) whose principal place of abode on specified dates was in a hurricane disaster area, and (2) who has sustained an economic loss by reason of Hurricanes Harvey, Irma, or Maria. Assuming taxpayer qualifies, presumably can enter on Form 5329 as code 12 (unless new code assigned). Allows a taxpayer who received such a distribution to: (1) repay the distribution by making additional contributions to a retirement account within three years, and (2) include the distribution in gross income by dividing the amount over a three-year period. Do not know how this will be handled.

• Allows individuals to recontribute funds to retirement plans if the funds were distributed for a home purchase in a hurricane disaster area that was cancelled on account of the hurricanes. Do not know how this will be handled.

 

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