The Taxpayer Certainty and Disaster Tax Relief Act of 2019, better known as the Tax Extenders Act, was signed into law on December 20, 2019 as part of the Further Consolidated Appropriations Act, 2020. This law provides a temporary renewal on approximately two dozen previously-expired tax credits and tax credits that were set to expire at the end of 2019.
This eases the burden on those regions hit by natural disasters in calendar year 2018 through 30 days after the Act’s enactment (January 19, 2020), including Hurricanes Michael, Florence and Dorian.
Below, we’ve outlined five of these tax breaks that taxpayers should know about as part of the Tax Extenders Act.
1. Casualty Losses
The ability to deduct casualty losses has been around for a long time as a way for affected taxpayers to reduce their income tax burden. The Act expands the deduction by allowing taxpayers who do not itemize to add their casualty loss to their standard deduction. It also removes the 10% of adjusted gross income limitation that had previously applied. This means that most taxpayers with a 2018 casualty loss will now have an increased deduction, and they can amend their returns to claim the related refunds.
2. Retirement Distribution
The Act waives the retirement fund early-withdrawal penalty of 10% (up to $100,000), allowing flexibility in taxpayers’ ability to divert retirement funds for disaster relief. These Qualified Disaster Distributions can be repaid within three years of receiving the distribution. If you don’t repay the distribution, the distribution is still subject to income tax, but the income can be recognized evenly over three years. In addition, if a home purchase was cancelled by an eligible disaster, the Act allows taxpayers to recontribute money they previously withdrew for the home purchase back into their retirement plans.
3. Employee Retention Credit
The Act provides for a tax credit for 2018 and 2019 for 40% of wages paid to eligible employees (during the time the business was inoperable) to any employer in a designated disaster area. The maximum credit per eligible employee is $2,400 (40% of maximum allowed wages of $6,000). Eligible employees are employees whose principal place of business was located in a federally-declared disaster area. Each federally-declared disaster area has an applicable incident period for the specific disaster that will provide the specific dates for which the business would qualify.
4. Charitable Contributions for Disaster Relief
The Act temporarily removes the existing percentage limitations (60% for individuals and 10% for corporations) on charitable contribution deductions made for the purpose of disaster relief. This means that taxpayers can claim charitable deductions of up to 100% of adjusted gross income for gifts contributed to supporting disaster relief efforts made by public charities (not private foundations).
5. Private Foundation Excise Tax
With the goal of encouraging large, one-time disaster relief donations from private foundations, the two-level private foundation excise tax on investment income is revised to a flat tax of 1.39%.
Connect with an Advisor for Assistance
If you have any questions about the Tax Extenders Act, please contact a Warren Averett advisor.