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US Tax Breaks Proposed For Sandy Clean-Up

by Leroy Baker, Tax-News.com, New York

12 December 2012


Charles Schumer (D – New York) and Robert Menendez (D – New Jersey) have announced comprehensive legislation to reduce the tax burden, within the states they represent in the United States Senate, on those financially impacted by Hurricane Sandy.

The legislation, the Hurricane Sandy and National Disaster Tax Relief bill of 2012, would make all disaster repair-related expenses fully tax deductible, provide penalty-free borrowing from retirement accounts, and enhance tax breaks for those who took in storm victims free of charge. It would also increase tax credits for the repair of homes and businesses, give a worker retention credit for businesses to keep paying workers, and accelerate depreciation for business equipment.

"When recovering from a hammer-blow like Sandy, every bit of support helps, and this legislation will make it easier for families and small businesses affected by the storm to marshal more of their resources for recovery," stated Schumer. "These changes to existing tax law are a common sense and simple way to help disaster victims, and a quick way to get them aid to repair their homes, to recover losses, and to support their businesses."

"This bill will provide critical tools to help families recover their losses, rebuild shattered businesses and restore communities devastated by the storm," added Menendez. "I know we’re closer to the starting line in this painful process of recovery than the finish line, but unveiling this bill is an important next step in our region’s recovery."

Schumer and Menendez’s tax package contains a number of Hurricane Sandy-specific tax provisions that provide relief to people impacted by the storm, but also includes provisions that will apply to any state that has suffered from a Federal Emergency Management Agency-declared major disaster this year.

Apart from a full deduction for disaster clean-up expenses, the proposed legislation would lift the current limitation on contributions to qualified charitable organizations to 50% of a taxpayer’s adjusted gross income, for qualified disaster contributions.

A further provision would waive the 10% penalty tax that would otherwise apply on an early withdrawal from a retirement plan for withdrawals by Sandy victims up to USD100,000. It would also increase the amount that they may borrow from their retirement plans without immediate tax consequences.

Under present law, a taxpayer may claim a deduction for any loss sustained during the taxable year not compensated by insurance. These losses are allowable if they exceed a USD100 limitation per casualty or theft and the losses are deductible to the extent that they exceed 10% of an individual taxpayer’s adjusted gross income. The proposal would waive both of those limitations for disaster losses.

Within the details of the worker retention credit, providing a credit for disaster-damaged businesses that continued to pay their employees' wages, regardless of whether they were still operating, eligible employers would be those who had active businesses in the disaster area that were rendered inoperable due to damage caused by the severe weather, and employed no more than 200 employees per day during the year before the disaster. The credit would equal 40% of the employee's first USD6,000 in wages paid between the date the business became inoperable and the date it resumed significant operations, but before March 1, 2013.

Within the Sandy-specific reliefs, the legislation would allow individuals who provide free housing for at least 60 consecutive days to persons displaced by Sandy to claim personal exemptions for those persons. The exemption would be USD500 per person, with a maximum of four exemptions per year. In order to qualify, the displaced person must have had a principal place of abode on October 27, 2012, in the Hurricane Sandy disaster area.

In addition, to ensure working families whose hours or wages were affected by the disaster do not also lose access to important tax provisions, a further proposal permits taxpayers impacted by Hurricane Sandy to look at the prior year's income for purposes of calculating the Earned Income Tax Credit and Child Tax Credit.

Disaster states would also be permitted to issue tax-exempt Sandy bonds between the date of bill’s enactment and January 1, 2018, to finance qualified activities involving residential rental projects, non-residential real property and public utility property located in the disaster area, as well as below-market-rate mortgages for low- and moderate-income home buyers whose principal residences were damaged by the disaster.

Finally, businesses in the disaster zone would be able to use bonus depreciation for capital expenditures associated with constructing commercial properties and residential rental properties. The provision increases the deduction to roughly 50% of the value of the property during the first year the property is placed in service.

The total cost of the Schumer-Menendez package is still being calculated, but it has been said that, if approved in its proposed form, it could turn out to be greater than the USD6.1bn 10-year tax package approved after Hurricane Katrina. The proposals would not involve a cost to either of the two states in tax revenues, but it would obviously reduce federal tax receipts.

TAGS: individuals | tax | small business | business | tax incentives | law | employees | retirement | legislation | United States | tax breaks | individual income tax

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