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Disaster victims could get tax relief as part of new tax bill; IRS already offering some easier retirement plan access

North Carolina flooding Hurricane Matthew_FEMA photo-cropped
North Carolina flooding in the wake of extensive hurricane rains. Photo courtesy Federal Emergency Management Agency

A bill that would extend some expired tax laws, enact a handful of new ones and correct some errors in last year's tax reform bill is now before the House of Representatives.

The extensive and expensive — the Congressional Budget Office estimates it will add another $55 billion to the federal deficit over the next 10 years — measure has a decent chance of clearing the House, where all it needs is the votes of the Republicans who control that chamber.

Its chances in the Senate, however, are less secure. Although the GOP holds the majority there, too, it will need Democratic help to attain the 60 votes needed in the Senate to approve the bill.

As the legislative effort to move the bill proceeds, I'll be blogging on some of the specifics in the bill.

Today, though, I'm focusing on a provision that help folks who are still struggling to recover from major natural disasters. That's a lot of people, given that this year we've had areas — and lives — across the United States ravaged by volcanoes, tornadoes and, most recently, hurricanes and wildfires.

Automatic extensions for disaster victims: Among the provisions in the bill, which is spearheaded by House Ways and Means Committee Chairman Rep. Kevin Brady (R-Texas), is a change that would allow for automatic extensions of Internal Revenue Service filing and deadline dates for taxpayers in federally declared disaster areas.

Specifically, the bill calls for a mandatory 60-day extension of federal tax deadlines for individuals who live in a major disaster area, as well as for people whose principal place of business is in the designated disaster zones.

The starting date for the two-month extension would be on the earliest incident date specified in the disaster declaration, for example, the day a hurricane made landfall.

If this provision remains in the final tax bill and it makes it through the House, Senate and White House signature steps, it would apply to all federally declared disasters that have been declared in 2018 and going forward.

This same mandatory extension period was proposed earlier by Rep. Tom Rice (R-South Carolina).

Rice, who represents many folks who were pummeled this year by hurricanes, introduced H.R. 6842, the Disaster Certainty Act on Sept. 17. The bill had been stalled in Ways and Means since then, but Rice obviously was able to convince Brady to roll it into this comprehensive year-end tax bill.

Retirement loans OK for some: While we wait to see whether this disaster tax provision and other tax measures make it into law, the IRS today reminded folks in some hurricane-devastated areas that they can use workplace retirement plan money to help pay for recovery efforts.

Eligible affected individuals are those in the Hurricane Michael or Hurricane Florence major disaster areas. This covers, for now, those in parts of Florida, Georgia, North Carolina and South Carolina. You can stay up to date on all eligible localities by periodically check the Federal Emergency Management Agency (FEMA) official disaster declaration Web page.

Such broad-based relief in connection with retirement accounts is not unusual. It has been offered in past disasters such as Hurricane Irma and Louisiana flooding.

Essentially, this latest IRS retirement plan ruling means that a disaster victim can take a hardship distribution or borrow up to the specified statutory limits from his/her tax-favored workplace retirement savings accounts.

Plans that qualify under the loan and hardship distribution disaster modifications are 401(k) plans available at many private companies, as well as similar employer-sponsored retirement plans, such as 403(b)s at nonprofits or public schools or 457(b)s as a state or local employee.

The easing of retirement plan access in disaster situations also allows a person who lives outside the disaster area to take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lives or works in the disaster area.

In addition, notes the IRS, while IRA owners cannot take out loans on those retirement accounts, they may be eligible to receive distributions under liberalized hardship procedures.

Plus, the reasons that normally apply to hardship distributions are broadened in these disaster cases, allowing for the loan money to be used for food and shelter.

Some tax rules remain: While this retirement plan loan and distribution access is good news for folks seeking funds to continue their efforts to return to their pre-disaster lives, there still are some tax limits.

While you can get a loan more easily, the IRS reminds eligible individuals that the tax treatment of retirement plan loans and distributions does not change.

That means the 401(k) etc. loan proceeds are tax-free if you repay the amount in five or fewer year. Miss that payback period and you'll owe tax on the loan amount.

Also, money taken out as a hardship distribution still is taxable at your ordinary tax rates. And if you are younger than 59½, then the early withdrawal penalty of 10 percent of the distribution still applies.

Still, it might be worth the potential tax and penalties if your retirement account is the only or best source of funds to recover from your disaster losses.

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