GOP tax plan could eliminate deduction for disasters
Congress just expanded relief to aid hurricane victims, but proposed cuts would undo changes
Congress moved quickly last week to allow victims of Hurricanes Harvey, Irma and Maria to write off more of their losses from federal income taxes, passing a bill that President Trump signed a week after it was introduced.
But the deduction the law expanded, for casualty and theft losses, could be eliminated under the “unified framework” for tax changes Republican House and Senate leaders and Trump unveiled last week.
Rep. Kevin Brady, R-Texas, who chairs the Ways and Means Committee and is an architect of the tax plan, told the conservative Heritage Foundation that getting rid of deductions that benefit only a few people would lead to lower rates for the most people.
“We’re eliminating the current maze of special-interest loopholes that benefit special interests but offer nothing but confusion for working families,” Brady said Thursday morning.
Later that morning, the House approved a Brady-sponsored bill to expand a deduction for uninsured theft and casualty losses, so victims of Harvey, Irma and Maria could write off any losses worth more than $500.
Without the change, those victims would face the same limitation faced by any homeowner whose house burns down or is de-
“I’ve been through a lot of tax reform efforts; they’re never easy.”
Former Senate majority leader
Trent Lott
stroyed by a tornado or flood: Only losses that exceed 10% of adjusted gross income would be deductible.
“Hundreds of thousands of families have lost everything — even loved ones,” Brady said before the bill’s passage. “This legislation will help them begin to recover through meaningful, targeted tax relief they need now.”
The nine-page framework released Wednesday lacks many details about how to pay for promised tax cuts, but it does say that just two of the itemized deductions in the tax code would remain, for charitable contributions and home mortgage interest.
It says nothing about retaining the deduction for uninsured economic losses from theft or events such as fire, flood, hurricane or tornado. Asked whether the de- duction would be retained, Brady’s office said only that Ways and Means Committee members continue to work on the treatment of specific deductions.
The situation illustrates the difficulty Congress may face passing comprehensive tax changes. Every line on the tax return got there because lawmakers decided it helped serve their constituents, or their political careers, to put it there.
If Brady fights to keep the disaster-loss deduction because of its importance to his constituents, other members will want line-items that help their constituents.
“I’ve been through a lot of tax reform efforts; they’re never easy,” said former Senate majority leader Trent Lott, a Republican from Mississippi who was instrumental in passing a similar expansion of the disaster-loss deduction after Hurricane Katrina in 2005. “People get the deductions and the credits, and when you go for something big, you hear about it.”
Lott said Congress members need to “keep their eye on the ball” and focus on overall policy, but he said he doubted the deduction for disaster losses would be eliminated.
The disaster-tax bill Brady sponsored last week makes it easier for taxpayers to take money out of their retirement accounts without penalty to pay for disaster recovery, and it lifts the cap on deductible charitable contributions for gifts to disaster relief agencies.
The charity piece of the bill probably wouldn’t be affected by tax changes, but it’s unclear what Congress plans to do about retirement plans.
The framework says incentives for saving for retirement would be continued, but laws would be changed to “simplify the benefits.”
If Congress does get rid of everything but mortgage interest and charitable contributions, it’s possible the expanded deduction in the law Trump signed Friday would benefit no one.
That’s because some in Congress and Trump’s administration have said they are trying to make tax changes retroactive to cover
2017. In other words, the new law would expand a deduction that would no longer exist when people file their 2017 tax returns.
As deductions go, the casualty or theft losses is not normally a budget breaker. The Joint Committee on Taxation estimated the “cost” — the amount of tax revenue that would be collected if it were not there — as $400 million to $500 million a year from 2016 to 2020.
According to Internal Revenue Service data, about 90,000 tax filers deducted $2.2 billion in losses in 2014.
That works out to a tax break of about $400 million for those filers, assuming an average tax rate of 18%.
Use of the deduction spiked in years that had catastrophic natural disasters.
In 2012, the year Superstorm Sandy hit, 160,000 families deducted nearly $5 billion.
After Hurricanes Katrina, Rita and Wilma in 2005, the last year Congress approved an expansion of the tax break like it did last week, the provision was used by
814,000 filers, who wrote off nearly $15 billion in losses. People with incomes less than
$25,000 deducted $2.8 billion.