On Saturday, August 8, President Donald Trump signed four separate executive orders after congressional Democrats and Republicans were unable to come to an agreement over stimulus legislation. The executive orders have left many questions over what relief they will provide, and whether they can withstand legal scrutiny. Payroll Tax Deferral President Trump has directed Treasury Secretary Steven Mnuchin to defer the withholding, deposit, and payment of employee payroll taxes for some employees for the period of September 1, 2020 through December 31, 2020. The direction for a deferral only applies to employees who make less than $4,000 on a pre-tax basis during a bi-weekly pay period. The deferral would prevent the imposition of interest and penalties, and further directs Secretary Mnuchin to explore methods, including legislation, to eliminate the obligation altogether. To accomplish this deferral, President Trump calls on Secretary Mnuchin to use the same qualified disaster authority he used to extend the income tax filing deadline from April 15th to July 15th this year. Political and legal commentators are questioning the legality of the order, and criticizing the potential long terms effects it may have on Social Security. The order may do little to provide actual relief, since many employers may hesitate to stop withholding payroll taxes that are not forgiven but simply deferred. Student Loan Payment Deferral President Trump has directed the Secretary of Education to extend the deferral of student loan payments through December 31, 2020. Previously at the beginning of the pandemic, President Trump had requested a 60-day deferral, which was later extended through September 30, 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Individuals that wish to continue making payments may still do so. Expanded Unemployment President Trump has redirected disaster relief funds in order to support lost wage payments and has called on the states to use the funds to create a new program – the “lost wages assistance program” – to provide for an additional $400 per week in unemployment payments. The additional payments would extend through December 27, 2020. To obtain Federal funds for the increased unemployment payments, state governors must agree to a cash-sharing requirement, whereby Federal funds would cover $300 and state funds would cover the remaining $100. The executive order encourages states to identify other funds to continue the payments if and when the Disaster Relief Fund is reduced to $25 billion. State governors are already criticizing the executive order, indicating that additional funds to pay the required contribution of $100 may not be available. Renter and Homeowner Assistance President Trump has indicated that his administration will minimize, to the greatest extent possible, evictions and foreclosures during the COVID-19 pandemic. To do this, President Trump has directed the Secretary of Health and Human Services and the Director of the Centers for Disease Control and Prevention to consider temporary measures to halt residential evictions which may be necessary to prevent the further spread of COVID-19. The executive order directs them to identify Federal funds that could provide financial assistance for those who are struggling to pay their monthly rent or mortgage. The effects of this executive order are still unclear since it does not outright ban evictions, but instead instructs agency leaders to review whether a ban is necessary and identify funds that may be used. We will continue to keep you informed as additional information becomes available and relief package negotiations continue. Please consult with your HBK advisor to determine whether and how you may be impacted by the recent executive orders.

As part of a wider effort to help victims of the 2017 Hurricanes, the IRS recently issued guidance providing safe harbor methods for individual taxpayers determining the amount of their casualty losses for their homes and personal belongings. The safe harbors provide additional help to taxpayers who may also benefit from the 2017 Disaster Tax Relief Bill. The details of that taxpayer friendly Bill can be found at the following link:

2017 Disaster Tax Relief Bill

Casualty Loss Rules

The amount of any casualty loss is the lessor of: (1) the difference in the property’s fair market value (FMV), immediately before and immediately after the casualty, resulting from the casualty, or (2) the adjusted basis for determining loss from the sale or other disposition of the property.

These rules can be difficult to apply because taxpayers do not often have an opportunity to have their property appraised prior to the casualty, and an appraisal following the event to determine both values can be costly. To simplify the calculation, the IRS provided safe harbor methods for determining the amount of an individual’s casualty loss for their personal residence and belongings in Revenue Procedures 2018-8 and 2018-9.

Safe Harbor Methods under Revenue Procedure 2018-8

An individual who suffered a casualty loss to their personal residence or personal property may use one of the following safe harbor methods provided by Revenue Procedure 2018-8. However, the costs of any improvements or additions that increase the value of the personal-use residential real property above its pre-casualty value, such as the cost to elevate the personal residence to meet new construction requirements, must be excluded from the estimate for purposes of this safe harbor.

Estimated Repair Cost Safe Harbor Method. Under the Estimated Repair Cost Safe Harbor Method, an individual may use the lesser of two repair estimates prepared by two separate and independent contractors, licensed or registered in accordance with state or local regulations. This method is generally available for casualty losses of $20,000 or less.

De Minimis Safe Harbor Method. Under the De Minimis Safe Harbor Method, an individual may estimate the cost of repairs required to restore the individual’s personal residence to the condition existing immediately prior to the casualty. An individual’s estimate must be a good-faith estimate, and the individual must maintain records detailing the methodology used for estimating the loss. The De Minimis Safe Harbor Method is generally available for casualty losses of $5,000 or less.

Insurance Safe Harbor Method. Under the Insurance Safe Harbor Method, an individual may use the estimated loss determined in reports prepared by the individual’s homeowner’s or flood insurance company.

Safe Harbor Methods for Federally Declared Disasters. An individual who suffered a casualty loss to their personal residence due to a Federally declared disaster may use one of the following safe harbor methods:

• Contractor Safe Harbor Method. Under the Contractor Safe Harbor Method, an individual generally may use the contract price for the repairs specified in a contract prepared by an independent contractor, licensed or registered in accordance with State or local regulations, setting forth the itemized costs to restore the individual’s personal residence to the condition existing immediately prior to the Federally declared disaster. To use the Contractor Safe Harbor Method, the contract must be a binding contract signed by the individual and the contractor.
• Disaster Loan Appraisal Safe Harbor Method. Under the Disaster Loan Appraisal Safe Harbor Method, an individual may use an appraisal prepared for the purpose of obtaining a loan of Federal funds or a loan guarantee from the Federal Government setting forth the estimated loss the individual sustained as a result of the damage to or destruction of the individual’s personal residence from a Federally declared disaster.

An individual who suffered a casualty loss to their personal belongings may use one of the following safe harbor methods:

De Minimis Safe Harbor Method. Under the De Minimis Safe Harbor Method, an individual may make a good faith estimate of the decrease in the fair market value of the individual’s personal belongings. An individual using the De Minimis Safe Harbor Method must maintain records describing the personal belongings affected and detailing the methodology used for estimating the loss. The De Minimis Safe Harbor Method is available for casualty or theft losses of $5,000 or less.

Replacement Cost Safe Harbor Method. If an individual chooses to use the Replacement Cost Safe Harbor Method for a Federally declared disaster, the individual must apply that method to all personal belongings for which a loss is claimed. To use this safe harbor method, an individual must first determine the current cost to replace the personal belonging with a new one and reduce that amount by 10% for each year the individual owned the personal belonging.

Safe Harbor Methods under Revenue Procedure 2018-9

An individual who suffered a casualty loss to their personal-use residential real property due to a Federally declared disaster may use a Cost Index Safe Harbor Method to determine the decrease in the fair market value of personal-use residential real property, including the personal residence, detached structures, and decking. Revenue Procedure 2018-9 provides cost indexes three size categories of personal residences based on the square footage of the personal residence and for seven geographic areas.

Under the Cost Index Safe Harbor Method, the taxpayer generally multiplies the square footage of their damaged property by the amount from the appropriate index to determine their loss. There are separate indexes for a total loss, a near total loss, interior flooding over 1 foot, damage to a detached structure, damage to decking, and structural damage from wind, rain or debris. The Revenue Procedure also provides seven examples to assist taxpayers in the calculation of their loss.

Tax Relief

A new law, the “Disaster Tax Relief and Airport and Airway Extension Act of 2017 (The Disaster Act),” provides temporary tax relief for victims of Hurricanes Harvey, Irma, and Maria. Businesses affected by the Hurricanes may qualify for a new “employee retention tax credit” of up to $2,400 for wages paid to eligible employees. The law also provides relief for affected individuals, including loosened restrictions for claiming personal casualty losses, tax-favored withdrawals from retirement plans, and the option to use prior year income for claiming earned income and child tax credits.

Employee Retention Tax Credit

The new law includes a valuable tax credit for an eligible employer whose business was affected by the hurricane. If a business could not operate for a period during and following the hurricane, and paid its employees during this period, the employer may be eligible. In general, the credit equals 40% of up to $6,000 of qualified wages paid to eligible employees resulting in a maximum credit of $2,400 per employee.

Individual Relief Provisions

Relief for Personal Casualty Losses

Under the general personal casualty loss rules, losses from an event like a hurricane are deductible only in the amount that exceeds 10 percent of your adjusted gross income (AGI) plus $100. Under The Disaster Act, the 10% of AGI floor is waived for qualifying disaster-related personal losses. However, the $100 reduction is increased to $500, meaning qualified losses are deductible to the extent they exceed $500. The Act also permits taxpayers who don’t itemize their deductions to claim personal casualty losses.

Relaxed Charitable Contribution Rules

The amount of deductible charitable contributions is generally limited to 50 percent of an individual’s AGI. Furthermore, an individual’s total itemized deductions (including charitable contributions) are phased-out as their AGI exceeds certain thresholds. The Act eliminates the 50 percent limitation and itemized deduction phase-out for qualified contributions made between August 23, 2017, and December 31, 2017, to a public charity for relief efforts in a hurricane-affected area.

Relief Provisions for Qualified Hurricane Distributions

The Disaster Act provides a number of relief provisions for qualified hurricane distributions. Generally, qualified hurricane distributions are distributions from tax-favored retirement plans (IRAs, 401(k)’s etc.) made following the hurricane and before January 1, 2019, to an individual whose principal residence is in a disaster area. The Act provides the following relief provisions for qualified hurricane distributions:

1. Penalty-free Treatment. Up to $100,000 of qualified hurricane distributions are exempt from the premature withdrawal penalty that applies to most retirement account withdrawals taken before age 59½.
2. Three-year Re-contribution Period. Qualified hurricane distributions can be re-contributed to eligible retirement plans and IRAs tax-free. This amounts to tax-free rollover treatment, and you can take advantage of this opportunity any time during the three-year period after you receive a qualified distribution.
3. Three-year Income Averaging. A qualified hurricane distribution that is not re-contributed (as in item “2”) is taken into the recipient taxpayer’s gross income to be rated over three years—beginning with the year in which the distribution is received.

Other Retirement Plan Related Provisions

Tax-free Re-contributions for Canceled Home Purchases. The Disaster Act includes provisions allowing individuals to make tax-free re-contributions to their retirement plans for canceled home purchases where money was distributed to purchase or construct a home in a disaster-affected area.

Larger Retirement Plan Loans Allowed. The Disaster Act increases the amount of tax-free loans from qualified retirement plans to the lesser of $100,000 or your vested account balance. The standard rules limit loans to the lesser of $50,000 or half your vested account balance.

Retirement Plan Loan Repayments Can Be Delayed. Generally, retirement plan loans must be repaid within five years to be tax-free. The Disaster Act extends the due date by one year for loans to hurricane-affected taxpayers that would have been due between the date of the hurricane and December 31, 2018.

The Disaster Act provides several opportunities for tax relief to victims of the hurricanes. However, each comes with its own set of qualifications or eligibility restrictions. If you believe you might benefit from one or more of these provisions, please contact us at HBK. As always, and in particular in these times when so many of us have suffered hurricane losses, we’re here to help.