Victims of Hurricane Harvey will see some immediate tax relief from the IRS, but Congress might be slower to act given lawmakers' long-standing disputes over whether to pay for relief legislation.
The IRS announced August 28 that victims of Hurricane Harvey in 18 Texas counties have until January 31, 2018, to file tax returns, but taxpayers in areas added to the disaster declaration later will automatically get the same filing and payment relief, the agency said.
Harvey dumped more than 24 inches of rain on Houston between the evening of August 24 and the morning of August 28, according to the National Weather Service, with rain expected to continue through much of the week.
The Senate Finance Committee adopted a wait-and-see attitude about potential tax relief legislation. “Congress will assess the full extent of the damage from the storm, but it is too early to know,” a committee spokesperson told Tax Analysts. A spokesperson for House Ways and Means Committee Chair Kevin Brady, R-Texas, referred questions to Brady’s district offices in Texas, which were unreachable. Brady’s district includes northern suburbs of Houston.
Ways and Means member Kenny Marchant, R-Texas, also said it was too early to comment on the potential for tax relief legislation, adding that he is likely to follow Brady’s lead.
Flood Fight on the Horizon
A House Democratic aide explained that the current level of funding in the federal flood insurance program is not nearly enough to address the Houston disaster, and House GOP lawmakers are divided over renewing the program before the start of the next fiscal year and whether to offset the cost of the Houston disaster.
House Financial Services Committee Chair Jeb Hensarling, R-Texas, does not support the flood insurance program, the aide said, noting that many congressional Republicans voted against relief for victims of Hurricane Sandy, with some calling for flood payments to be offset with spending cuts.
“This has the potential to be a bigger fight than the debt ceiling,” the aide said, referring to the upcoming negotiations to raise the federal borrowing limit. The aide speculated that the large block of congressional Republicans from Texas could work with Democrats on a temporary funding increase for flood insurance, but a looming fight among Republicans later this fall over higher funding could slow action on other priorities. Any action on tax relief would be separate from the flood insurance legislation, another aide said.
Ways and Means Committee member Bill Pascrell Jr., D-N.J., said he expects to reintroduce a bipartisan flood relief measure with his Ways and Means colleague Tom Reed, R-N.Y., when Congress returns from recess in September. The National Disaster Tax Relief Act of 2015 (H.R. 3110) would provide relief for major disasters declared between 2012 and 2015 and permanently extend current disaster tax relief provisions.
“I have been working on ways to use the tax code to help victims and local governments meet challenges they face following a disaster since my constituents were devastated by Hurricane Sandy in 2012,” Pascrell told Tax Analysts.
The disaster relief bill includes provisions such as expensing disaster-related expenses, deductions for charitable giving, waiving requirements for mortgage revenue bonds, expanding the new markets tax credit program and the low-income housing tax credit program, and using tax-exempt retirement funds without a penalty.
A spokesperson for Ways and Means Committee member Joe Crowley said the New York Democrat would likely support tax relief for Hurricane Harvey victims, depending on the specific provisions of a bill. “It’s unclear as of now what the most appropriate action will be as the crisis is still occurring,” the aide said.
In the wake of Hurricane Sandy, Pascrell, Crowley, and a bipartisan group of New York-area lawmakers introduced the Hurricane Sandy Tax Relief Act of 2012 to help individuals and businesses in the storm’s path. Among its provisions, the legislation sought to increase the limits on charitable giving for disaster relief, allow families to use previous yearly earnings to calculate the child tax credit and the EITC, and allow taxpayers to take penalty-free distributions from retirement savings.
Lessons From the Past
Tax incentives will be most helpful during the reconstruction phase, once search and rescue ends and rebuilding begins, former Rep. Charles W. Boustany Jr., told Tax Analysts. Boustany said he was directly involved in planning the tax provisions needed to help his Louisiana district, which was hit directly by Hurricane Rita.
“The most important thing we did was to pass the Gulf Opportunity Zone Act of 2005. It defined the zone that was affected geographically by the hurricane and then applied certain tax provisions to that area that were very helpful in promoting the recovery,” he said, adding that Congress should revisit that legislation to determine the next steps forward.
The law allowed for expanded expensing, including for the removal of debris, according to Boustany, who said he received help from former Rep. Jim McCrery, then a senior Ways and Means member. The law also extended the net operating loss carryback period from two to five years and provided benefits for temporary housing.
Lawmakers introduced legislation last year in response to severe flooding in Louisiana. In September 2016, Finance Committee member Bill Cassidy, R-La., introduced S. 3358, the Flood Emergency Tax Relief Act of 2016, which would have allowed taxpayers affected by flooding in the Mississippi River Delta to make penalty-free withdrawals from retirement accounts.
Boustany introduced a related bill in the House, H.R. 6137, the Louisiana Flood and Storm Devastation Tax Relief Act. That bill, in addition to waiving penalties for early withdrawals from retirement accounts, would have allowed partial write-offs of demolition and cleanup costs, allowed businesses to claim the work opportunity tax credit for hiring workers in the disaster zone, and more.
Existing Tax Relief for Victims
Several provisions in the Internal Revenue Code grant relief to taxpayers affected by a disaster, according to a 2013 Congressional Research Service report. Some, including casualty loss deductions under section 165 and exemption from taxation for disaster relief payments to people under section 139, are permanent. The IRS also has statutory authority to postpone tax-related deadlines for taxpayers affected by federally declared disasters, including deadlines for filing returns and paying income, gift, and estate taxes, according to the report. The IRS can also waive underpayment penalties in the event of a disaster.
Taxpayers located in areas affected by disasters may also take four years — instead of the generally allowed two — to replace a home destroyed in a flood or other type of “involuntary conversion” and defer any gain, according to a 2017 Congressional Research Service report. Casualty losses, including from government-ordered destruction of unsafe property, may also be deducted against income in the prior tax year, the report said.
However, Congress in recent years has passed tax bills to aid people affected by specific disasters like Hurricane Katrina, the report said. The House and the Senate in September 2005 passed the Katrina Emergency Tax Relief Act to provide tax relief to victims of that storm.
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