California Wildfire Tax Law Changes

The Bipartisan Budget Act of 2018 that was signed into law on February 9 included the following tax provisions that provide relief for taxpayers affected by the California wildfires that occurred on or after October 8, 2017 for 2017 federal tax returns.

Deduction for Personal Casualty Losses

Uncompensated losses in the applicable California wildfire disaster area:

• Must exceed $500 in order to take a deduction
• Removes the requirement that the loss exceed 10% of AGI
• May be taken as an itemized deduction or as an increase in a taxpayer’s standard deduction

Special Rule for Determining 2017 Earned Income for the Earned Income Tax Credit and Child Tax Credit

Qualified individuals may use their earned income from 2016 to determine their earned income tax credit and their child tax credit for their 2017 federal income tax return if their 2017 earned income is less than their 2016 earned income.

Qualified individuals are those whose principal place of abode was located in the California wildfire disaster zone or they lived in the California wildfire disaster area and the individual was displaced from their home because of the wildfire.

Penalty-Free Access to Retirement Funds

•  For qualified California wildfire distributions, an individual can withdrawal funds (up to $100,000) from a retirement account free of the 10 percent early withdrawal penalty and can spread the taxable portion on that distribution over a three year period.
• Allows that any qualified California wildfire relief withdrawal will not be taxable if it is recontributed within three years of the date of distribution.
• Increases the maximum loan amount for qualified California wildfire relief to $100,000.
• Allows for re-contribution of retirement plan withdrawals for cancelled home purchases or construction of a principal residence due to the California wildfire.

Charitable Contributions for Hurricane Relief

Suspends the limitation on charitable contributions associated with California wildfire relief that are made between October 8, 2017 and December 31, 2018.