2019 Tax Law Change - Disaster Area Provisions

Congress slipped a significant number of tax law changes into their budget bills this December. Many of those extended the Trump/GOP tax law disaster provisions that were meant to only apply to a few years. Essentially, all Presidentially declared disasters since the older law was passed either follow the rules of the Trump Law, or have specific bills passed to cover them. There are also some nice new provisions tossed in as well. I will not differentiate which are new and which are just extensions and instead will just cover what applies and when.

This post is not comprehensive or in full detail. I have tried to include and explain to the maximum extent necessary for the average taxpayer. If this post leads you to think you can use the benefits, you should talk to a tax pro or research the actual law. For the love of all that is holy, do NOT rely on your software to get this right. I use some of the best tax software in the world for my clients and I will be watching it like a hawk to make sure it gets this right. I have not included provisions that only apply to good sized businesses or employers.

To determine if your disaster qualifies, you go to the FEMA website HERE and search for "Major Disaster Declaration" under Declaration Type and narrow it with your state. I included the SC Dorian page HERE so you can see the map. If you are in the orange area, most of the rules apply to you. A few more esoteric rules require you to be in a red area (not applicable to Dorian in SC). The disaster declaration must have been made between Jan 1st, 2018 and Feb 18th, 2020 and the disaster must have started before December 20th, 2019. These dates are on the FEMA pages.

Once you know the disaster applies to you, you can see what tax benefits you have. There are retirement account benefits, deductions, Child Tax Credit (EITC and ACTC) benefits, filing deadline extensions and charitable deduction provisions. The charity provisions apply to everyone who donates to the disasters, not just those affected by them.

Retirement Provisions: These generally require you to have suffered an economic loss as a result of the disaster, though it doesn't seem that the limits are tied to the amount of loss. Simply put, you would need losses that were not reimbursed by insurance - but check with your tax dude to confirm you qualify before futzing with your retirement accounts. I'm going to use 401k here, but I mean all the 403b, Thrift Savings Plan, 457 etc. deferred compensation type plans.

1. You can avoid the 10% penalty on an early 401k or IRA withdrawal. The max is $100,000 per disaster. The withdrawal must be made after the disaster began and June 17th, 2020. You still have to pay taxes on the withdrawal but...
2. You can spread the taxes over three years starting with the year you took it out. Or...
3. You can put the money back within 3 years of the distribution date and owe no taxes.
4. If you took advantage of the $10,000 first time home buyer exclusion but the disaster prevents you from buying or building the home, you can put the money back tax and penalty free. The withdrawal must have been made within 180 days before the disaster and 30 days after it ended. The money must be put back before June 17th, 2020.
5. The 401k loan allowed amount was doubled to $100,000. Payments due between the start of the disaster and 180 days after may be delayed until June 17th, 2020.

Disaster Loss Deduction:

The rules for a disaster loss deduction are modified to eliminate the 10% floor and to allow the deduction to be taken even if you do not itemize. Basically, you take your losses, subtract any insurance reimbursement, subtract $500 (the new floor) and that's the amount deducted. If you itemize, just include it as an itemized deduction. If you don't, add it to your standard deduction. Make sure your software or tax pro handles this right.

Very rough, even number example: Say your standard deduction is $12,000 and your house has $10,000 in damage done. Insurance reimburses $5000. So your deduction is $10,000 minus $5000, minus $500 which equals $4,500. If you take the standard deduction, it would now be $16,500. If you had $15,000 in itemized deductions, the disaster loss would now make them $19,500. I'm not sure if you are allowed to game the system if you were at $11,000 in itemized deductions before itemizing, meaning the total would be $15,500 with the casualty loss, by taking the standard deduction and adding $4,500 to it to get $16,500. I need to dig deeper and see the forms and regulations.

Earned Income Credit and Additional Child Tax Credit:

Here's where things get really weird. If your principal abode was in the disaster area, or you were displaced due to the disaster (these are weird so ask a pro if your home wasn't in the zone) and your earned income went DOWN, you can use the prior year's earned income in these calculations if it works out better. You basically have to run the numbers to see if it's better. You can do this for any year that falls within the disaster dates. You have to use the prior year's income for BOTH credits or neither.

For Married Filing Jointly, only one spouse needs to be affected, but you have to use BOTH spouses' income from the prior year for the calculation.

I can't see anything requiring the disaster to be the CAUSE of the reduced income.

Filing Deadline Extension:

You get a 60 day extension of any filing deadline that falls between the start and end of the disaster. The 60 days starts after the disaster is over. It applies to IRA contribution deadlines as well. It only applies to disasters occurring AFTER December 20th, 2019.

Charitable Contributions:

This will likely not apply to very many people, BUT, if you contribute to a qualified charity benefiting one of the disasters between Jan 1st, 2018 and Feb 18th, 2020, in cash (credit and checks as well, just not goods) you can exceed the 60% of AGI limit normally applied to charitable deductions. That's right, if you already donated 60% of your income to charity, you can donate more if it goes to benefit these disasters.