The Katrina Emergency Tax Relief Act of 2005 (KETRA), signed by President
Bush on September 23, 2005, contains many provisions that will provide immediate
tax relief to individuals and businesses affected by the devastating damage of
Hurricane Katrina and to those who provide aid to those victims. Here is a
summary of KETRA’s provisions.
Who Benefits? KETRA provides relief to taxpayers in the “Hurricane Katrina
disaster area,” as well as others not located in that area (those who donate to
the Katrina disaster relief efforts, for example). The measure of tax relief
granted by the new law depends on where the taxpayer was located within the
disaster area. For instance, those located in the “core disaster area” (as
determined by the government) are entitled to greater relief than those not
located in the core disaster area.
Work Opportunity Tax Credit Very generally, the Work Opportunity Tax Credit (WOTC)
is available to employers who hire individuals from certain targeted groups.
KETRA creates a new targeted group (“Hurricane Katrina employees”) for purposes
of the WOTC. Included in “Hurricane Katrina employees” are those who:
On
August 28, 2005, had a principal place of abode in the Hurricane Katrina core
disaster area and who are hired during the two-year period beginning on that
date for positions located in the core disaster area or
On August 28, 2005,
had a principal place of abode in the core disaster area and were displaced from
that abode and who are hired during the period beginning on that date and ending
on December 31, 2005.
Thus, employers who hire displaced and relocated Hurricane Katrina employees
in their new locations can qualify for the WOTC.
Employee Retention Credit KETRA provides a tax credit to eligible employers
who conducted business in the core disaster area and whose businesses are
inoperable due to hurricane damage.
The credit is available for wages paid to eligible employees after August 28,
2005, and before January 1, 2006, during the inoperable period. The tax credit
(a direct offset against tax) is 40% of qualified wages up to a maximum of
$6,000 of wages per employee. Several requirements must be met.
Increased Charitable Contribution Limits KETRA temporarily increases the tax
law limits on charitable contribution deductions for an individual’s cash
contributions. It also increases the limits for corporations’ cash donations to
the extent those donations are earmarked for Hurricane Katrina relief.
An individual may deduct qualified cash contributions up to her/his
contribution base (essentially, adjusted gross income) less other charitable
contributions made during the year. (Ordinarily, the deduction is limited to a
percentage of the contribution base, depending on the type of charity and nature
of the donation.) Qualified contributions are cash contributions made from
August 28, 2005, through December 31, 2005, to a qualified charity for which the
taxpayer has elected qualified contribution treatment. Note that, for
individuals, there is no requirement that the qualified contributions be
specifically for Hurricane Katrina Relief.
A corporation may deduct qualified contributions up to its entire taxable
income less other contributions. (Corporate charitable deductions are otherwise
generally limited to 10% of taxable income.) However, corporate qualified
contributions must be specifically for Katrina relief efforts to be eligible for
the increased limit.
Tax Exemption for Housing Katrina Victims For the 2005 and 2006 tax years,
KETRA provides an additional personal exemption of $500 for each Hurricane
Katrina displaced individual who receives free housing from the taxpayer in the
taxpayer’s principal residence for a period of 60 consecutive days ending during
the tax year. The additional exemption is not subject to the otherwise
applicable income-based phaseout of personal exemptions, and it is allowed in
computing alternative minimum tax.
Retirement Plan Distributions Exempt from Penalties KETRA exempts up to
$100,000 in qualified Hurricane Katrina distributions from retirement plans from
the 10% early withdrawal penalty tax normally assessed on early benefit
withdrawals (generally, those prior to age 59½).
To qualify, the distribution must be:
From an eligible retirement plan (an
Individual Retirement Account (IRA), tax-qualified retirement plan (a 401(k) or
profit sharing plan, for example), a governmental 457 plan, or a 403(a) or
403(b) annuity arrangement),
Made on or after August 25, 2005, and before
January 1, 2007, and
Made to an individual whose principal place of abode was
located in the Hurricane Katrina disaster area and who has sustained an economic
loss due to the disaster.
Tax Treatment of Plan Distributions KETRA also provides that a qualified
Hurricane Katrina distribution is includable in a taxpayer’s gross income
ratably over the three-tax-year period beginning with the tax year the
distribution is received. This provision allows taxpayers to avoid having to
report and pay tax on the full amount in the year of distribution. However, if
the amount taken as a qualified Hurricane Katrina distribution is recontributed
to an eligible retirement plan at any time during the three-year period after
the distribution is made, then the original distribution is tax free. Therefore,
there will be no current income tax on a distribution to the extent it is later
recontributed to an eligible retirement plan. Moreover, there will be no 20%
income tax withholding on qualified distributions, as there is with certain
other eligible distributions from retirement plans.
Plan Loan Limits Increased and Payments Postponed For participant loans made
to a qualified individual from a qualified retirement plan after September 23,
2005, and before January 1, 2007, the tax law’s loan dollar limit is increased.
The limit rises from $50,000 to $100,000, and up to 100% (rather than 50%) of
the participant’s vested account in the plan may be borrowed (up to the dollar
limit). KETRA allows qualified individuals with plan loans outstanding on or
after August 25, 2005, to delay repayment for one year of amounts that would
otherwise become due from August 26, 2005, through December 31, 2006. Several
requirements apply.
Other Provisions Among the other tax benefits provided by KETRA:
An
enhanced charitable contribution deduction for business contributions of food
inventories.
An increase in the standard mileage rate to 70% of the business
mileage rate (currently, $.485) for taxpayers using a vehicle in providing
donated services for Katrina relief from August 25, 2005, through December 31,
2006.
An exclusion from income for reimbursements made by charities to
volunteers for the cost of using a passenger vehicle in providing donated
services for Katrina relief from August 25, 2005, through December 31, 2006,
(certain requirements apply).
Modified rules for deducting casualty or theft
losses arising in the Hurricane Katrina disaster area under which the losses
will not be subject to the 10% of adjusted gross income floor or the $100
minimum normally applicable to such losses.
A tax exclusion for qualifying
individuals for any income from the discharge of non-business debts (such as any
forgiven government loans).
An extension of the replacement period for any
“involuntary conversions” (for example, a taking over by the state) of property
to five years if the property was located in the Hurricane Katrina disaster area
and the involuntary conversion occurred after August 24, 2005.
A deferral of
filing and payment of certain taxes (employment and excise taxes, for instance)
for taxpayers affected by Hurricane Katrina until February 28, 2006.
Summary The Katrina Emergency Tax Relief Act of 2005 could affect you or your
business even if you are not located in the disaster area. If you have any
questions about how the law may affect your tax situation, please let us know.
The information provided in the newsletter has been obtained
from sources believed to be reliable but its accuracy is not guaranteed.
