Bipartisan Budget Act contains tax provisions

The Bipartisan Budget Act of 2018, P.L. 115-123, enacted in February, contains many tax provisions, including retroactive extension of a number of tax provisions for 2017 only and relief for victims of the California wildfires.

CALIFORNIA WILDFIRE RELIEF

Retirement plan distributions and loans

The act provides that the 10% additional tax imposed by Sec. 72(t) on early distributions from a qualified retirement plan will not apply to any “qualified wildfire distribution.” A qualified wildfire distribution is any distribution (up to $100,000) from a plan described in Sec. 402(c)(8)(B) made to a “qualified individual” during prescribed periods. A qualified wildfire distribution can be made to an individual whose principal place of abode during any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, was located in the presidentially declared California wildfire disaster area and who sustained an economic loss by reason of the wildfires. The act also allows eligible taxpayers to spread out any income inclusion resulting from those distributions over a three-year period.

Taxpayers who receive qualified wildfire distributions can repay them into a qualified plan (other than an individual retirement account (IRA)) within three years of the distribution, and the repayment will be treated as an eligible rollover distribution. Repayment to an IRA will be treated as a transfer from an eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution. Similarly, taxpayers who made withdrawals from qualified plans after March 31, 2017, and before Jan. 15, 2018, to purchase or construct a residence in one of the wildfire disaster areas and whose purchase or construction was canceled because of one of the wildfires can repay those distributions on or before June 30, 2018.

The act also increases the limit on the amount of a loan from a qualified employer plan that will not be treated as a distribution, from $50,000 to $100,000. This increase applies to loans made between Feb. 9, 2018, and Dec. 31, 2018. The act also removes a present-value limitation and allows for a one-year delay for the repayment of these loans.

Employee retention tax credit

The act provides eligible employers with an employee retention tax credit. Eligible employers must have conducted an active trade or business on Oct. 8, 2017, in the California wildfire disaster zone that was inoperable any day after Oct. 8, 2017, and before Jan. 1, 2018. (A wildfire disaster zone is a portion of a wildfire disaster area that is determined by the president to warrant individual or individual and public federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.)

The credit equals 40% of up to $6,000 (a maximum of $2,400) in “qualified wages” paid to an eligible employee by an eligible employer. An eligible employee is one whose principal place of employment by an eligible employer on Oct. 8, 2017, was in a wildfire disaster zone.

Charitable contribution limit

For charitable contributions paid in cash between Oct. 8, 2017, and Dec. 31, 2018, to a Sec. 170 charitable organization for relief efforts in the California wildfire disaster area, the act temporarily suspends the percentage limitations in Sec. 170(b) and provides that those contributions will not be taken into account for purposes of applying Sec. 170(b) or the Sec. 170(d) carryover rules to other contributions. The act also temporarily loosens the rules regarding excess contributions and makes an exception to the overall limitation on itemized deductions for qualified contributions.

Personal casualty losses

The act eases the rules for casualty losses for taxpayers who suffer a “net disaster loss” in the California wildfire disaster area. A net disaster loss is the excess of the taxpayer’s “qualified disaster-related personal casualty losses” over the taxpayer’s personal casualty gains (as defined in Sec. 165(h)(3)(A)). A qualified disaster-related personal casualty loss is a casualty loss that arises on or after Oct. 8, 2017, in the California wildfire disaster area.

These net disaster losses are not subject to the otherwise applicable deduction threshold of 10% of the taxpayer’s adjusted gross income. However, they are subject to a higher Sec. 165(h)(1) per-casualty floor of $500 instead of the otherwise applicable $100. The act also allows nonitemizers to increase their standard deduction by the amount of their net disaster loss. This increase is not treated as an alternative minimum tax preference item.

Earned income and child tax credits

The act allows qualified individuals to elect to use their prior-year, instead of current-year, earned income for purposes of the Sec. 32 earned income tax credit and the Sec. 24 child tax credit. A qualified individual is a person whose principal place of abode for any portion of the period Oct. 8, 2017, through Dec. 31, 2017, was (1) in the California wildfire disaster zone, or (2) in the California wildfire disaster area (but outside the disaster zone) and who was displaced from his or her abode by reason of the wildfire to which the declaration applies.

EXTENDERS

Provisions for individuals that expired at the end of 2016 and were retroactively reinstated for 2017 included:

• Sec. 108(a)(1)(E), which excludes from gross income a discharge of qualified principal residence indebtedness;
• The Sec. 163(h)(3)(E) treatment of mortgage insurance premiums as qualified residence interest; and
• Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.

A number of special business- and energy-related credits, deductions, shorter depreciation periods, and other provisions that had expired at the end of 2016 also were retroactively reinstated for 2017 and, for some energy credits, through 2021.

MISCELLANEOUS PROVISIONS

The act also mandated creation of a new Form 1040SR for taxpayers 65 and older that is supposed to be as simple as Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, but will allow for reporting of Social Security benefits and retirement distributions, interest and dividends, and capital gains and losses taken into account in determining adjusted net capital gain.

The law also modifies the rules for hardship distributions, directing the IRS to eliminate for plan years beginning after Dec. 31, 2018, the rule under Regs. Sec. 1.401(k)-1(d)(3)(iv)(E)(2) prohibiting contributions to qualified plans for six months after a taxpayer takes a hardship distribution.

• Bipartisan Budget Act of 2018, P.L. 115-123

— By Sally P. Schreiber, J.D., a JofA senior editor.