8720 / What special rules were implemented under the 2017 Tax Act for 2016 disaster areas?

Under the 2017 tax reform legislation, distributions from retirement accounts made because of a qualified 2016 disaster are exempt from the 10 percent early distribution penalty that is otherwise imposed under IRC Section 72(t). Plans that make such a distribution also are protected against potential disqualification. The amount that may be treated as a 2016 disaster area distribution is limited to $100,000 (the amount for any given year must be reduced by the amounts treated as 2016 disaster area distributions in prior years).¹

Taxpayers may recognize income attributable to a qualified 2016 disaster distribution over a three-year period (unless an election to the contrary is made) and are also permitted a three-year period for re-contributing qualified 2016 disaster distributions. These repayments will essentially be treated as though they were rollovers made within the 60-day window.

Casualty losses associated with a 2016 disaster are deductible regardless of whether total losses exceed 10 percent of the taxpayer’s adjusted gross income (AGI), so long as the loss exceeds $500 per casualty.

Qualified “2016 disaster area” means any area that the President declared a disaster area during the 2016 calendar year. Taxpayers who took distributions in 2016 or 2017, and whose principal place of abode was in a disaster area, are entitled to the relief so long as they sustained an economic loss because of the disaster.² The distribution had to have been made on or after January 1, 2016 and before January 1, 2018 to qualify. See Q for a discussion of the expanded plan loan rules under the 2020 CARES Act. See Q for a discussion of the expanded coronavirus-related hardship distribution rules.