Seldom will you see an article on this website that targets only one area of the United States. In fact, this is the first such article and hopefully it is the last. The subject, of course, deals with the disastrous consequences of hurricane Katrina, the Gulf Coast states and the federal government's response from a tax perspective.
Interestingly enough, the Katrina Emergency Tax Relief Act of 2005 does not only apply to individuals living in the disaster areas. Rather, some portions of the Act offer benefits to all Americans wishing to help their fellow Americans in their time of need. Certain charitable giving rules have been suspended for a period of time for donations to hurricane Katrina victims.
Before going into specifics, we need to look at one definition - core disaster area. The core disaster area is that part of the hurricane Katrina disaster area determined by the President to warrant individual or public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. For a detailed listing of the areas included in the core disaster area, you can go to the Federal Emergency Management Agency's website.
Normally, a 10% penalty applies to early distributions from a qualified retirement plan, 403(b) plan or IRA. The Act eliminates that penalty on distributions of up to $100,000 received on or after August 25, 2005 and before January 1, 2007 if it is a qualified Hurricane Katrina distribution. A qualified distribution must be made to a person whose principal place of abode on August 28, 2005 is located in the Hurricane Katrina disaster area and who has suffered economic loss as a result of Hurricane Katrina.
Normally, failure to report early distributions as such can jeopardize the qualification of a retirement plan. If the total of otherwise qualifying distributions from all plans maintained by an employer is not in excess of $100,000, then characterizing the distributions, as qualified distributions not subject to the 10% penalty will not violate any tax law.
Any distribution received by an individual can be included in income over a three-taxable year period beginning with the year in which the distribution is made. During the three-taxable year period, an individual may re-contribute funds to the qualified plan and treat them as a qualified rollover contribution, thus avoiding income tax on the amount withdrawn and re-contributed.
In some instances, individuals may have withdrawn funds from a qualified plan to use in purchasing a home. If the home purchase was cancelled due to Hurricane Katrina, the money can be re-contributed to the plan and the individual will owe no income tax on the funds.
The limitation on the amount that can be borrowed from a qualified plan increases to $100,000 or 100% of a qualified individualÂ’' account balance, and any payments due on or after August 25, 2005 are extended for one year. To the extent this extension causes the loan to be paid in more than the required maximum of five years, that requirement is waived. The increased limitation applies to loans taken out on or after August 25, 2005 and on or before December 31, 2006.
The Act provides a windfall of sorts for those making contributions from August 28, 2005 to December 31, 2005. Regardless of the charity benefiting from the contribution, the percentages of income limit and carryover limitations are suspended. The contributions cannot be made to private foundations, other than certain supporting organizations, and the waiver of limitations must be elected by the taxpayer. Corporations also are allowed a similar waiver, but the contributions must be made to the Katrina relief effort.
If you house a "Hurricane Katrina displaced individual," you may be eligible for a $500 deduction for housing that individual. The deduction is applicable only if you house the person for free, can be taken in 2005 or 2006 and the aggregate total of the deductions over the two-year period cannot exceed $2,000. You also are allowed the $500 deduction only once for a particular person.
The standard 14-cent charitable mileage rate is increased to 70% of the standard rate used for business purposes for any use of a vehicle in Katrina-related relief efforts during the period beginning August 25, 2005 and ending December 31, 2006. Any reimbursement to a volunteer by a charity for mileage can be excluded from gross income. Again, the mileage must relate to Katrina relief efforts and the volunteer must be subject to the same requirements of documentation that would be required of an employee.
In addition to the foregoing, certain other rules have been relaxed for Katrina victims. These are:
- Exclusion of cancellation indebtedness income from gross income when it is related to Katrina damage.
- The first $100 and 10% of adjusted gross income are generally excluded from the amount of personal casualty loss you can deduct on your return. These exclusions do not relate to losses on or after August 25, 2005 that are attributable to Katrina.
- The time for filing certain tax returns and paying the balance due as shown on the return is extended to February 28, 2006. The extension is available to those affected by Katrina and applies to any period for performing an act which has not expired before August 25, 2005.
- The two-year period for replacing property compulsorily or involuntarily converted (destroyed) as a result of Katrina is extended to five years for residential or business property located in the Katrina disaster area. The replacement property must be located in the Katrina disaster area.
Additional Business Provisions
A "Hurricane Katrina employee," as defined in the statute, is added as a member of a group targeted for purposes of the Work Opportunity Credit. The employee must be hired before December 31, 2005. Instead of the current certification requirements, an individual is allowed to provide an employer with reasonable evidence that he or she is a Hurricane Katrina employee.
An "eligible employer," as defined in the statute, is allowed a credit equal to 40% of the qualified wages of each eligible employee. An eligible employer is one whose principal place of business was located in the core disaster area and whose business was inoperable on any day after August 28, 2005 and before January 1, 2006 as a result of Katrina. An eligible employee is a person whose principal place of employment was with the eligible employer on August 28, 2005 and in the core disaster area. Qualified wages are those paid to an eligible employee on a date beginning after August 25, 2005 and before January 1, 2006. Once a business has resumed significant operations at its principal place of business, wages paid cease to qualify for the credit.
Contributions of food inventory made between August 28, 2005 and December 31, 2005, inclusive, will not be subject to the general limitations on contributions of ordinary income property. Additionally, whereas the normal requirements limit the deduction to C corporations, the Act places no limitation on such donations. Contributions of food inventories cannot be deducted to the extent they exceed 10% of the taxpayerÂ’s income from all trades or businesses making such contributions.
Book inventories donated to public schools are also afforded special treatment, but are limited to C corporations.
The general theme of this month's articles is the effect of government regulation. In the case of the Katrina Emergency Tax Relief Act of 2005 one can actually say government regulation will apparently help, and not hinder, recovery for a large number of Americans. Additionally, even those who were not affected by Katrina, but who have tried to help, may receive some benefit also. The Act affords many of us the potential to shave a little off our taxes this year. Be careful, though, because the devil is in the details. If you have any questions at all regarding this or other aspects of the Act, give us a call. Helping you helps those affected by Katrina. Think of the number of Americans we can help together. Sounds like a win-win situation.
Have a great November and have a great Thanksgiving.