Article Highlights: Legislation for Major Disasters Definitions Qualified Disaster Distributions Re-Contributing Withdrawals for Home Purchases Retirement Plan Loans Loss Limitations, Revised Relief for Non-Itemizers Employee Retention Credit Other Disaster Area Tax Issues Most of us will always remember the year 2020, as much as we may like to forget it. On top of the COVID-19 emergency, street protests (both peaceful and not), and hotly contested election races, the U.S. has had numerous natural disasters – hurricanes, an unprecedented number of wildfires, severe windstorms, flooding, and what seems like everything except a plague of locusts (so far, the gigantic swarms of the insects that have invaded Africa and the Middle East haven’t made it across the Atlantic). Congress typically passes legislation to provide some temporary tax relief to the victims of major disasters. Recently, Congress did just that when it passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which the president signed on December 27, 2020. If you were a victim of one of the disasters covered by this bill, you may be interested to see if any of the tax benefits may be of help for you. First, a few definitions: “Qualified disaster area” means any area in which a major disaster was declared by the president, during the period beginning on January 1, 2020, and ending on February 25, 2021, if the incident period of the disaster began on or after December 28, 2019 and on or before December 27, 2020. However, any area in which a major disaster was declared only because of COVID-19 is not included. “Qualified disaster zone” is the portion of any qualified disaster area that the president, during the date parameters noted above, determined to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act because of the qualified disaster in that disaster area. “Incident period” means, with respect to any qualified disaster, the period specified by the Federal Emergency Management Agency (FEMA) as the period when a disaster occurred. (However, for the purposes of this act, that period shall not be treated as beginning before January 1, 2020, or ending after January 26, 2021.) For a current listing of all affected areas and the dates of storms, floods, wildfires, and other disasters occurring in 2020 in federal disaster areas, go to https://www.irs.gov/newsroom/tax-relief-in-disaster-situations Here are the highlights of the tax-relief measures included in the Taxpayer Certainty and Disaster Tax Relief Act of 2020: Qualified Disaster Distributions – If you have sustained an economic loss because of a qualified disaster, you are allowed to withdraw from your eligible retirement plans – such as a 401(k) or 403(b) – and IRAs up to $100,000, less the aggregate amounts treated as qualified disaster distributions in prior years, without paying the 10% early-withdrawal penalty that applies if you are under age 59½. The distribution is still taxable, but if you choose to, the income from the qualified distribution can be spread over a three-year period beginning with the year of distribution, rather than you paying all of the tax in the distribution year. Re-contribution Option – Further, you can re-deposit any amount of the qualified disaster distribution in one or more re-contributions over the three-year period beginning on the day after the date of the distribution. For example, let’s say you take a qualified disaster distribution of $30,000 from your IRA on Dec. 10, 2020, and opt to spread the tax over years 2020, 2021, and 2022 by including $10,000 of the distribution amount in each year’s return. In 2022, you are financially able to re-deposit the $30,000 to your IRA, which you do on Nov. 1, 2022. You would then need to amend your 2020 and 2021 returns to remove the $10,000 income from each year and claim a refund of the taxes paid on those parts of the distribution. None of the distribution would be reported on your 2022 return. Waived 20% Withholding Requirement – Normally, 20% of a retirement plan distribution is withheld as income tax. This 20% withholding rule will not apply to a qualified disaster distribution. Distribution Timing – Only distributions made on or after the first day of the incident period of a qualified disaster and before June 25, 2021, can qualify. Special Rule for Individuals Affected by More Than One Disaster — The $100,000 limitation is applied separately to distributions made with respect to each qualified disaster. Re-Contributing Withdrawals for Home Purchases – If you are under 59½, the general rule is that you’ll owe a 10% penalty on the taxable part of a distribution from an IRA (or an employer’s retirement plan). However, this 10% early-withdrawal penalty doesn’t apply to a distribution (lifetime maximum $10,000) from an IRA used by a first-time homebuyer to pay the qualified acquisition costs for a principal residence, if the funds are spent within 120 days of receiving the distribution. When disaster strikes, the taxpayer’s plans to purchase or construct a home sometimes are upended, and the funds from the withdrawal can’t be spent during the allotted time period. To prevent the 10% penalty from kicking in when this happens, the act provides that any individual who received a qualified distribution during the period beginning 180 days before the first day of the incident period of a qualified disaster and ending 30 days after the last day of the incident period may make one or more contributions to an eligible retirement plan that total no more than the amount of the qualified distribution. The re-deposit must occur during the period beginning on the first day of the incident period of the qualified disaster and ending on June 25, 2021. To qualify to make the recontribution, the amount distributed must have been intended to be used to purchase or construct a principal residence in a qualified disaster area but was not so used due to the qualified disaster in that area.