The Bipartisan Budget Act of 2018 was signed into law on February 9th, 2018. The act includes several provisions aimed at helping victims of the recent California wildfires.
Casualty Loss Reporting
For qualified wildfire losses on or after October 8, 2017, the act eliminates some of the restrictions involved in claiming these losses, as follows:
- It removes the requirement to subtract 10% of adjusted gross income in the calculation.
- It allows these losses to be deducted even without itemizing deductions, by increasing the standard deduction amount by the amount of the net disaster loss.
- It increases the $100-per-casualty floor to $500.
These changes will make the casualty loss deduction much more meaningful to taxpayers who do not itemize, or for those whose 10% of adjusted gross income would have negated a large portion of the loss.
Charitable Deduction Limitations
The deduction for charitable contributions is generally limited to a percentage of adjusted gross income (for individuals) and a percentage of taxable income (for Corporations). The budget act suspends these limits for any contributions made for wildfire relief efforts. This applies to contributions made after October 7, 2017 and before January 1, 2019.
This means you have until the end of 2018 to make your contributions for wildfire relief without being subject to the usual income limitations.
The charity must issue you a receipt or acknowledgement letter which states that the contribution is to be used for wildfire relief efforts.
The act eliminates the 10% penalty for early withdrawal from eligible retirement plans for any individual whose principal residence is within the disaster area and has sustained an economic loss by reason of the wildfires. This applies for up to $100,000 of distributions made on or after October 8, 2017, through December 31, 2018.
In addition, the income from these qualified wildfire withdrawals can be reported ratably over a three-year period, unless the taxpayer elects to include it all in the year received.
Alternately, the withdrawals could be repaid to the plan within three years and be treated as a nontaxable rollover.
Cancelled Home Purchases
For individuals who had taken retirement plan withdrawals to purchase or construct a home within the California wildfire area, where the home purchase or construction was cancelled due to the fires, a re-contribution may be made during the period of October 8, 2017 through June 30, 2018 to avoid tax on the plan withdrawal.
Employee Retention Credit
The act provides an employee retention credit for employers whose place of business was inoperable due to the wildfires yet continued to pay wages. The credit is 40% of wages paid while the business was inoperable (up to $6,000 maximum) per employee. This applies to wages paid from October 9, 2017 through December 31, 2017.
Existing disaster provisions
Victims may also benefit from traditional, previously enacted, disaster loss rules for presidentially declared disaster areas. These rules allow these victims to claim their casualty loss on the return for the year of the loss, or to amend the previous year return to claim the deduction in that earlier year.
This means that victims of the 2017 fires can file an amended 2016 return to claim the loss, as long as that loss was in a presidentially declared disaster area. Victims should look at both years to determine which would be the most beneficial.
Note that these disaster losses could generate a Net Operating Loss that could be carried back three years for Federal, or two years for California. This allows more opportunity to generate refunds currently, when victims are more likely to need the cash.
This listing of disaster relief items is not exhaustive. You should also be aware that California does not conform to most of the provisions that were put in place by the Bipartisan Budget Act of 2018.
California fire victims should consult with a tax professional to be sure they are utilizing all the benefits for which they may be eligible.