California Wildfire Victim Relief

This Week's News
February 16, 2018


Members of CSEA have been lobbying Congress to grant relief to victims of the California Wildfires similar to the relief provided to hurricane victims in the South and East. That relief was included in the Bipartisan Budget Act of 2018 (P.L. 115-123) passed and signed into law on Friday, Feb. 9, 2018. Here are the main things you need to know with the bill section identified:

Total Casualties Hurdle is normally 10 percent of AGI, but for certain disasters that hurdle is waived. That is now the case for the California Fires – there is no AGI hurdle before losses become deductible (see IRC §165(h)(2)(A)). This, of course, is major. (H.R. 1892 §20104(b)(A))

Individual Casualty Hurdle, normally at $100 per casualty, was changed to $500. While that sounds like a bad thing, it is typical when the casualties hurdle has been waived. (H.R. 1892 §20104(b)(B))

Itemizing Deductions is generally required in order to take casualty losses (Form 4684). But in this case, if the taxpayer is otherwise not itemizing, the casualty loss from the California Wildfires may be added to the Standard Deduction (IRC §63(c)). Furthermore, this addition to the Standard Deduction is not an AMT preferential item so taxpayers in AMT do not lose this deduction when taking the Standard Deduction. (H.R. 1892 §20104(b)(C)&(D))

While we refer to these fires as the California Wildfires, the Act simply refers to them as California Fires. But it does define these relief items as applying to the California wildfire disaster zone which is defined as the federally declared disaster areas. (H.R. 1892 §20101)

Retirement Funds can be used by a taxpayer for disaster recovery. Specifically, IRC §72(t) shall not apply to any qualified wildfire distribution, which is limited to $100,000. In addition, the taxpayer may repay the distribution over a three-year period beginning the day after the date the distribution was received and the repayment is treated as a rollover being deposited via a direct trustee-to-trustee transfer within 60 days of the distribution. This treatment applies to IRAs and plans other than IRAs. (H.R. 1892 §20102(a))

If the retirement funds are used to purchase a replacement house, then the repayment must be made by June 30, 2018. The treatment of the distributions and repayment is the same as above. This provision applies if the distribution was received after March 31, 2017 and before January 15, 2018 and the house purchased is in the California wildfire disaster area, but not directly due to a loss from the wildfires. (H.R. 1892 §20102(b))

For loans from qualified plans by taxpayers who sustained an economic loss from the wildfires, the loan limit is increased from $50,000 to $100,000. If the due date for any repayment occurs between October 8, 2017 and December 31, 2018, then the due date is delayed for one year, and any subsequent repayments are likewise delayed one year. (H.R. 1892 §20102(c))

Charitable Contributions are allowed above the 50 percent (or 60 percent) limit but cannot increase the total charitable contributions to be greater than the “charitable base” (IRC §170(b)(1)(H)) or AGI.

Employee Retention Credit equal to 40 percent of the qualified wages for each eligible employee is available for businesses. The limit of qualified wages for each employee is $6,000. Qualified wages are those paid to employees between October 8, 2017 and January 1, 2018, for a business that was rendered inoperable. There are numerous details related to this provision that should be studied by any practitioner with a client that fits this group. (H.R. 1892 §20103)

Other Items are included but are unlikely to impact most practitioners. One example is the provisions for modifying retirement plans pursuant to the above – since most practitioners rarely act as a Third Party Administrator for a plan.

Naturally, it will require some time for the IRS to make programming changes to accommodate the many changes of the Bipartisan Budget Act of 2018, as well as to coordinate the required updates to e-filing specifications with software providers. At this point, no one seems to have predictions on that timing.

Written By: Richard Ogg, EA, CFS, NSSA and Vicki Mulak. EA, CFP