According to the U.S. National Oceanic and Atmospheric Administration, the total cost of hurricanes, wildfires, floods and other disasters in 2018 was approximately $91 billion. In response to the ongoing impact of these catastrophic incidents, on December 20, 2019, President Trump signed into law the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (Disaster Act) as part of an omnibus spending package. The Disaster Act provides relief for taxpayers affected by disasters in 2018 through January 19, 2020, and extends over 30 Code provisions, generally through 2020. The law includes many tax relief provisions that aid in Federally Declared Disaster Areas for 2018 and/or 2019. These provisions are detailed below.
Special disaster-related rules for use of retirement funds
The Disaster Act provides an exception to the 10 percent early retirement plan withdrawal penalty for qualified disaster relief distributions (not to exceed $100,000 in qualified hurricane distributions cumulatively). It also allows for the re-contribution of retirement plan withdrawals for home purchases canceled due to eligible disasters and provides flexibility for loans from retirement plans for qualified hurricane relief.
Employee retention credit for employers affected by qualified disasters
The Disaster Act creates a qualified disaster employee retention credit for 2018 through 2019. The tax credit is for 40 percent of wages (up to $6,000 per employee) paid by a disaster-affected employer to an employee from a core disaster area.
Other disaster-related tax relief
The Disaster Act also provides for:
- Temporary suspension of limitations on charitable contributions. The Disaster Act temporarily suspends limitations on the deduction for charitable contributions associated with qualified disaster relief.
- Special rules for qualified disaster-related personal casualty losses. With respect to uncompensated losses arising in a disaster area, the Disaster Act eliminates the current law requirements that personal casualty losses must exceed 10 percent of adjusted gross income to qualify for the deduction and eliminates the requirement for taxpayers to itemize to get this relief.
- Special rule for determining earned income. The Disaster Act allows taxpayers in designated disaster areas to refer to earned income from the immediately preceding year for purposes of determining the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) in tax year 2018.
Automatic extension of filing deadline
The Disaster Act provides any individual with a principal residence or a taxpayer with a principal place of business in a disaster area an automatic 60-day extension with regard to any tax filing. This applies to federally declared disasters declared after December 20, 2019.
Modification of excise tax on private foundations
The Disaster Act modifies the private foundation excise tax rules from a 1-2 percent rate system to a flat rate of 1.39 percent. This modification is intended to encourage private foundations to make larger one-time donations, such as is needed in the case of disaster relief, and applies to tax years beginning after December 20, 2019.
The Disaster Act extended many deductions, some of which expired after 2017. This means taxpayers can amend their 2018 returns to take advantage of any deductions that would have resulted in a lower tax. These deductions include:
- Exclusion from gross income of discharge of qualified principal residence indebtedness
- Treatment of mortgage insurance premiums as qualified residence interest
- Reduction in medical expense deduction floor to 7.5 percent
- Deduction of qualified tuition and related expenses
- The three-year recovery period for race horses two years old or younger
- The seven-year recovery period for motorsports entertainment complexes
- Accelerated depreciation for qualified Indian reservation property
- Empowerment zone incentives deduction for energy efficiency improvements
Many credits were also extended as part of the Disaster Act, including the Indian employment credit (extended through tax years beginning before January 1, 2021), the railroad track maintenance credit (extended through 2022), and the following credits were extended through 2020:
- New Markets tax credit
- Employer tax credit for paid family and medical leave
- Work opportunity tax credit
- The health coverage tax credit
- Mine rescue team training credit
- American Samoa economic development credit
- Bio-diesel and renewable diesel credit
- Second-generation biofuel producer credit
- Non-business energy property
- Qualified fuel cell motor vehicles credit
- Alternative fuel refueling property credit
- Two-wheeled plug-in electric vehicle credit
- Renewable electricity production credit
- Energy-efficient homes credit
Repeal of increase in unrelated business taxable income for certain fringe benefit expenses
The previous Code required the unrelated business taxation income (UBTI) of tax-exempt organizations to be increased by expenses related to qualified transportation fringe benefits (the so-called “church parking tax”). The Disaster Act repeals this requirement retroactively to amounts paid or incurred after December 31, 2017. This means those tax-exempt organizations affected should apply for refunds on an Amended 990-T of prior years’ taxes paid.
Any individual or business impacted by disasters since 2018 should talk to their accountant or financial advisor about the Disaster Act and how they may benefit from the provisions in the new law.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.