U.S. Senator Kay R. Hagan (NC) today co-sponsored the bipartisan Southeastern Disaster Tax Relief Act to give much-needed tax relief to North Carolinians working to rebuild after April's devastating storms and tornadoes.
"This spring, some of the worst storms and tornadoes in decades hit North Carolina, and I am working with Governor Perdue and local officials to help our communities rebuild," said Hagan, a member of the Senate Banking Committee. "This bill will provide critical tax relief to our North Carolina families and businesses working to pick up the pieces left by April's violent storms. My prayers continue to be with the families who lost loved ones in this tragedy. We will continue to rebuild until our communities are made whole again, and I am working with my colleagues on both sides of the aisle to advance this commonsense tax relief bill."
This bill is fully paid for and would establish a Southeastern disaster area comprised of counties that were affected by the recent tornadoes, severe storms and flooding. For counties to be eligible for the benefits in the bill, they must be presidentially declared major disaster areas and determined by the president to warrant individual and/or public assistance between April 13, 2011, and June 7, 2011.
North Carolina counties eligible under this guideline are: Bertie, Bladen, Craven, Cumberland, Currituck, Greene, Halifax, Harnett, Hertford, Hoke, Johnston, Lee, Onslow, Pitt, Robeson, Sampson, Tyrell, Wake and Wilson.
Some of the key credits included in the bill include expensing for demolition and clean up costs, education benefits, and early withdrawals from retirement plans so storm victims rebuilding will not be penalized. A full list of tax credits included in the bill is below.
North Carolinians affected by the storms can contact Senator Hagan's office toll-free at 877-852-9462 with questions or concerns or visit www.hagan.senate.gov/stormrecovery.
The bipartisan bill was sponsored by Senate Banking Committee Ranking Member Richard Shelby (AL). In addition to Hagan, other original cosponsors include: Jeff Sessions (AL), Mark Pryor (AR), John Boozman (AR), Johnny Isakson (GA), Saxby Chambliss (GA), Claire McCaskill (MO), Roy Blunt (MO), and James Inhofe (OK).
Expensing for Demolition and Clean-up Costs
Businesses may immediately expense 50 percent of the demolition and clean up costs associated with the disaster rather than capitalize the costs in the taxpayer's basis and depreciate over time. These benefits would expire on December 31, 2013.
Education Tax Benefits
Current law provides a Hope Scholarship Credit for the first two years of postsecondary education equal to 100% of the first $1,000 of qualified tuition and related expenses, and 50% of the next $1,000 for a maximum of $1,500. There is also a Lifetime Learning Credit available to college students equal to 20% of the first $10,000 in qualified tuition and related expenses. This proposal doubles the maximum for the Hope Credit to $3,000, and it doubles the lifetime learning percentage from 20% to 40% for a maximum of $4,000. These benefits are for taxable years 2011 and 2012.
Penalty-Free Withdrawals from Retirement Plans
This bill waives the 10 percent penalty tax for early withdrawals from retirement plans to allow individuals who were affected by the storms to utilize their savings in their recovery. The total amount of penalty-free distributions an individual can receive from all plans, annuities, or IRAs is $100,000. Individuals would be permitted to pay the income tax on distributions over a three-year period, and they could also re-contribute the distributions over a three-year period and receive rollover treatment.
Losses to Individual's Home and Property
Personal casualty losses result from the damage, destruction or loss of property from unexpected events, such as natural disasters. Under present law, these losses are deductible by taxpayers who itemize only to the extent that the losses exceed 10 percent of individuals' adjusted gross income and a $100 floor. This proposal eliminates the 10 percent and $100 floor requirements for casualty losses resulting from these storms for 2011, allowing the full dollar amount of the losses not reimbursed by insurance to be deducted on individuals' 2011 tax returns.
Tax-Exempt Bond Financing
This bill provides states and local governments in the Southeastern disaster area the authority to issue private activity bonds to spur private investment in the areas affected by the storms. The amount of tax exempt bonds each state may issue is based on the state's population in the disaster area multiplied by $1,000, resulting in $3.2 billion in bond authority for Alabama. Bond proceeds can be used to pay for acquisition, construction, and renovation of nonresidential real property, low-income rental housing, low-income single-family residential housing, and public utility property (e.g. gas, water, electric, and telecommunication lines). In order to participate, businesses must have either suffered an economic loss attributable to the disaster or be designated by the state as replacing a business that suffered a loss. These provisions would remain in effect until January 1, 2018.
Employee Retention Credit for Employers
This bill provides a 40 percent tax credit to small businesses who continue to pay their employees while their business is inoperable. These provisions apply to employers with fewer than 200 employees for wages paid up to $23,400 prior to January 1, 2012.
Low-Income Housing Credit
Under current law, states receive allocations of low-income housing credit based on population. This proposal allows states to receive additional housing credit allocations through 2013 of $8 per person in the disaster area.
Special Rules for the Earned Income Tax Credit and Child Tax Credit
Under current law, these tax benefits are only available to working individuals with earned income. However, given the number of individuals and businesses affected by the storm and the resulting loss of employment, this bill allows individuals in affected areas to calculate their earned income for the Earned Income Tax Credit and Child Tax Credit using earnings from the previous year if their income this year is less than it was last year.
Special Rules for Small Timber Producers
Under current law, taxpayers may only deduct $10,000 of reforestation cost. The amendment raises the limit to $20,000 and allows losses to be carried back for 5 years, rather than two years. The proposal only applies to taxpayers owning less than 500 acres of timber.
Treatment of NOL Attributable to Disaster Losses
This bill extends the net operating loss carryback period from two to five years for net operating losses attributable to casualty losses caused by the disaster and new investment and repairing existing investment in the areas damaged by the storms.
Tax Relief for Public Utilities
This legislation allows entities with casualty losses associated with public utility property to either carryback a net operating loss attributable to the casualty loss for 10 years or treat the casualty losses as having occurred 5 years prior to the storm. Additionally, public utility companies may carry back net operating losses for five years.
Credit to Holders of Tax Credit Bonds
This proposal authorizes the affected states to issue debt service tax credit bonds providing credits against Federal income tax instead of interest payments. These bonds allow states to provide assistance to communities unable to meet their debt service requirements as a result of the storm. These benefits expire January 1, 2013.
Suspension of Limitations on Charitable Contributions
The bill allows individuals and corporations to deduct cash contributions towards disaster relief efforts without regard to percentage limitations for 2011.
Adjustments Regarding Taxpayer and Dependency States
This provision gives the Treasury Secretary the authority to make adjustments to ensure that taxpayers do not lose any deduction or credit or experience a change of filing status by reason of temporary relocations caused by the disasters (i.e. residency requirements for dependents) for 2011 and 2012.
Advance Refunding of Tax-Exempt Bonds
Advance refunding allows the bond issuer to restructure eligible debt by refinancing at a lower rate or spreading interest payments over a longer period of time. States and municipalities are provided one additional advance refunding for certain governmental bonds and private activity bonds. The maximum amount of advance refunding bonds for each state is equal to one half of the state's amount of the new tax exempt bond authorization.
Special Rules for Mortgage Revenue Bonds
Certain requirements for mortgage revenue bonds issued under the private activity bond authorization may be waived including the first-time homebuyer requirement. The income rules allow the mortgages to be made to mortgagors whose family incomes are 140 percent or less of the applicable median family income. Additionally, the proposal increases from $15,000 to $150,000 the amount of a qualified home-improvement loan to repair residences in the disaster area. These provisions expire December 31, 2016.
Additional Exemption for Housing Displaced Individuals
This proposal provides an additional exemption of $500 for housing each individual displaced by the disaster for 60 consecutive days with a maximum deductable amount of $2,000. These benefits are for taxable years 2011 and 2012.
Exclusion of Certain Cancellation of Indebtedness Income
Gross income generally includes any amount realized from the discharge of indebtedness, such as mortgage debt. This bill would provide an exemption for indebtedness discharged by commercial lenders when the forgiveness is in response to damage suffered from the disaster. These provisions expire for discharges occurring before January 1, 2013.
Extension of Replacement Period for Non-Recognition of Gain
This bill extends from two to five years the replacement period in which a taxpayer may replace property that was compulsorily or involuntarily converted as a result of the disaster.
Rescission of Unobligated Federal Funds
All of these provisions are offset by rescinding $12 billion in unspent and uncommitted federal funds. The President's Fiscal Year 2011 budget indicated that over $700 billion in federal funds are unobligated, $80 billion of which are in accounts that are between six and 20 years old. Under CBO conventions, it will take rescissions of approximately $12 billion to pay for the projected cost of the bill (approximately $5-6 billion). Although the official score has not been finalized by the Joint Committee on Taxation, this projection is in line with the Heartland Disaster Tax Relief Act.