Disaster relief for the victims of Hurricanes Irma and Harvey isn’t just about immediate necessities like food, clean water and shelter. It could also come wrapped up in the tax code.

Texas Republican Rep. Kevin Brady, head of the House Ways and Means Committee, is floating several proposals intended to provide relief for those suffering from the devastating storms. Chief among them is a measure to allow affected residents to access their 401(k) retirement savings without paying a penalty.

“No two disasters are the same. These won’t be boilerplate,” Brady told reporters last week. “We’ll tailor these to our communities and their needs going forward.”

The IRS has already relaxed the rules for households hit by Harvey that need to take out loans from their 401(k)s or make hardship withdrawals. On Aug. 30, the IRS issued guidance streamlining the loan applications for affected residents and waiving the six-month ban on retirement contributions that typically follows a hardship withdrawal. The agency said it will also ease certain restrictions to allow households to use their retirement funds to purchase basics such as food and shelter.

Under current law, individuals can take out a loan against their 401(k) plans interest-free as long as it is paid back within five years. After that, the money is subject to normal income taxes as well as a 10 percent fine. Hardship withdrawals are also taxable and subject to the same penalty.

A spokesman for Brady said there is no formal hurricane tax relief bill yet. But Brady told reporters that he expects bipartisan support for allowing disaster victims to forgo those penalties. The fee is designed to discourage households from tapping their retirement funds for other purposes, but even some financial experts said there are understandable exceptions to that rule.

“If you don’t allow people access to their money, it reduces the likelihood that some people will participate in the [retirement] plan,” said Diann Howland, legislative director for the American Benefits Council. “Recognizing an emergency, giving people some flexibility is the humane thing to do.”

Brady is also seeking higher limits on deductions for casualty losses, write-offs for expenses related to rebuilding and ways to encourage donations to relief organizations. He said such changes will likely be targeted and temporary, rather than permanent.

Still, some conservative groups said such special exemptions underscore the challenge facing Republicans as they undertake a sweeping rewrite of the tax code that streamlines the system.

“Putting aside the understandable sympathy motives, I’m not a big fan of this idea,” said Douglas Holtz-Eakin, president of the American Action Forum. “I prefer the tax code to be permanent, and structured to enhance trend growth; that is the tax reform objective and this doesn’t promote that.”

Kyle Pomerleau, director of federal projects for the Tax Foundation, said some of the proposals are consistent with the House Republican blueprint for tax reform. Write-offs for rebuilding, for example, could be wrapped into the GOP push for full and immediate expensing for businesses.

“It isn’t clear to me that the tax code is the best place through which to provide disaster relief,” he said. “However, the policies [Brady] seems to be pushing are not necessarily in conflict with a simpler tax code if enacted broadly.”

To reporters, Brady defended his proposals as focused solely on affected households.

“It’s important that our package be helpful, not wasteful,” he said. “We focus on what our communities need, not what Washington needs.”

Source: cnbc economy
Lawmakers to propose tax relief for hurricane victims