Katrina Emergency Tax Relief Act of 2005

On September 23, 2005, President Bush signed the "Katrina Emergency Tax Relief Act of 2005 (KETRA)." This tax act extends the due date for making tax payments, including employment and excise taxes, and filing returns that were due after August 25, 2005. Some of the provisions in this bill are available to any individual located in the Hurricane Katrina disaster area, while other provisions are only available to those located in the core disaster area. Provisions relating to charitable contribution deductions are available to taxpayers throughout the United States.

The core disaster area is defined as that portion of the Hurricane Katrina disaster area that is eligible for individual or individual and public assistance. The portion of the Hurricane Katrina disaster area that is only eligible for public assistance is not in the core disaster area.

Below are the highlights of the provisions of the bill:

The 10% adjusted gross income limitation and the $100 casualty loss deduction do not apply to an individual’s casualty or theft losses that arise in the Hurricane Katrina disaster area.

The mileage rate individuals may use to compute a tax deduction for personal vehicle expenses associated with charitable work is statutory and has not been increased since 1997. For a taxpayer providing relief related to Hurricane Katrina, the "Katrina Emergency Tax Relief Act of 2005" sets the charitable mileage rate at 70% of the standard business mileage rounded up to the next highest cent.

Effective for tax years ending after August 24, 2005, reimbursement by charitable organizations to volunteers for the costs of using a passenger automobile in connection with providing donated services for Hurricane Katrina relief during the period of August 25, 2005 to December 31, 2006 may be excluded from the volunteer’s gross income to the extent:

1. The amount doesn’t exceed the business standard mileage rate, and

2. The substantiation requirements applicable to business expenses deducted by employees are satisfied.

For tax years beginning in 2005 and 2006, taxpayers are allowed an additional exemption of $500 for each Hurricane Katrina displaced individual they house, up to a maximum $2,000 for both years. An individual may be a Hurricane Katrina displaced individual only one time for all tax years. A Hurricane Katrina displaced individual is an individual:

1. Whose principal residence on August 28, 2005 was in the Hurricane Katrina disaster area, AND

2. Who is displaced from the residence and if the residence was not in the core disaster area, the residence was damaged by Hurricane Katrina or the individual was evacuated from the residence because of Hurricane Katrina, AND

3. Who is provided housing free of charge by the taxpayer in the taxpayer’s principal residence for a period of 60 consecutive days which ends in the tax year in which the exemption is claimed.

In order to claim the additional exemption, the taxpayer must provide the displaced individual’s taxpayer identification number (usually Social Security number). The exemption will be denied if the taxpayer received any rent or other amount from any source in connection with providing housing for a displaced individual.

Qualified individuals can elect to calculate their EIC and refundable child credit for the tax year that includes August 25, 2005 using their earned income from tax year 2004, if their earned income for the tax year that includes August 25, 2005 is less than their earned income for tax year 2004. Qualified individuals are individuals who on August 25, 2005 had their principal residence in either:

• The core disaster area, OR

• The Hurricane Katrina disaster area (but outside the core disaster area) and the individual was displaced from his/her principal residence because of Hurricane Katrina.

Penalty-Free Withdrawals from Retirement Plans for Hurricane Katrina Disaster Victims

An individual cannot treat more than $100,000 as qualified Hurricane Katrina distributions for any tax year. This is an overall limit and must be reduced by the aggregate amounts treated as qualified Hurricane Katrina distributions received by the individual for all previous tax years.

Any individual who receives a qualified Hurricane Katrina distribution may recontribute the distribution at any time within 3 years from the date of the distribution to an eligible retirement plan. The individual must be the beneficiary of the plan and the plan must allow a rollover contribution. The total amount of these repayment contributions cannot exceed the amount of the qualified Hurricane Katrina distribution. If the distributions are recontributed within the three-year period, there is no tax or penalty.

Taxpayers who included qualified distributions in taxable income, and who repaid the distribution within the three-year period, can file an amended return to receive a refund of the taxes paid.

A qualified Hurricane Katrina distribution is included in a taxpayer’s gross income ratably over the three-tax year period beginning with the tax year the distribution is received. The three-year averaging provision is automatic unless the taxpayer elects not to have it apply. To elect out of three-year averaging, the taxpayer includes the full amount in income.

Certain retirement plan or IRA withdrawals for first-time home purchases that were canceled due to Hurricane Katrina can be returned to a qualified plan or IRA tax-free and without penalty. This recontribution provision applies to any individual, and not just individuals who resided in a Hurricane Katrina disaster area. Individuals who live outside of a Hurricane Katrina disaster area can also take advantage of this provision. For purposes of the first-time homebuyer recontribution rules, a qualified distribution means any distribution that:

1. Is a 401(k) plan hardship distribution, or a distribution from a 403(b) plan due to financial hardship, or a hardship distribution of salary reduction contributions from a 403(b) plan, or a first-time homebuyer distribution from an IRA, AND

2. Is received after February 28, 2005, and before August 29, 2005, AND

3. Was to be used to buy or build a principal residence in a Hurricane Katrina disaster area, AND

4. The principal residence was not bought or built.

For individuals, qualified contributions are not limited to the normal overall limitation for charitable contributions. The amount deductible as a charitable contribution in any tax year is normally limited to a percentage of an individual taxpayer’s contribution base. The percentage varies depending on the type of donee and property contributed. Contributions to qualified charities for hurricane victims are exempt from this limitation.

Qualified contributions are cash charitable contributions made during the period beginning on August 28, 2005, and ending on December 31, 2005, to a Section 170(b)(1)(A) charity for which the taxpayer has elected qualified contribution treatment.

A corporation may deduct qualified contributions up to its entire taxable income less other contributions. Qualified contributions in excess of this amount are carried forward for 5 years as contributions to which the normal 10% limit applies.

An eligible employer does not qualify if he/she employed an average of more than 200 employees on business days during the tax year. An eligible employee is one whose principal place of employment on August 28, 2005 with the eligible employer was in a Hurricane Katrina core disaster area.

For contributions made after August 28, 2005, and before January 1, 2006, any taxpayer, whether or not a C corporation, engaged in a trade or business may claim the enhanced deduction for donations of food inventory. For taxpayers other than C corporations, the total deduction for donations of food inventory in a tax year generally may not exceed 10% of the taxpayer’s net income for the tax year.

C corporations can make a charitable contribution of qualified books after August 26, 2005 and before January 1, 2006. The deduction for such contributions equals the lesser of two times the basis or basis plus one-half of the appreciated value. A qualified book contribution is a charitable contribution of books to a public school that provides elementary education or secondary education.

Technical Explanation and Other Provisions of the Act

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