| Newly Enacted Tax Laws Aid in Katrina Recovery |
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September 29, 2005 Despite its reputation for sometimes acting slowly on policy initiatives, the federal government has moved swiftly to change tax laws in order to aid those stricken by disasters in the Gulf Coast. On September 21, 2005, the House of Representatives and the Senate passed a compromise agreement providing tax relief for Katrina victims. President George W. Bush signed the bill into law on September 23. The Katrina Emergency Tax Relief Act of 2005 provides $6.1 billion in tax relief for individuals and businesses affected by the hurricane as well as incentives to promote charitable donations for victims. The measure includes provisions that will assist victims with housing and employment. Congress is also working on a package of long-term tax breaks expected to be ready for a vote in mid-October. The 21 major relief provisions of the new tax laws include: * Suspension of personal casualty loss adjusted gross income (AGI) and dollar floors Essentially, Hurricane Katrina losses are treated as a separate deduction from all other casualty losses. However, the new law does not change the fact that only taxpayers who itemize deductions can take a casualty loss. Taxpayers in a Presidential Disaster Area have the option of deducting the loss on the return for the year in which the loss occurred (2005 for Hurricane Katrina victims) or deducting the loss on their previous-year returns (2004). Elimination of the 10 percent/$100 limits will mean larger refunds for Katrina victims who amend 2004 returns. Charitable contributions. Generally, an individual?s contributions to a tax-exempt charitable organization is limited to 50 percent of the taxpayer?s contribution base (i.e., AGI) for the tax year. Any excess amount may be carried over for a period of up to five years. The new law removes the 50 percent limitation for all cash donations to a qualified charitable organization for the period beginning on August 28, 2005, and ending on December 31, 2005. Under the provision, an individual?s deduction for qualified contributions is allowed up to the amount by which the taxpayer?s contribution base exceeds the deduction for other charitable contributions. Contributions in excess of this amount are carried over to succeeding tax years. The provision also exempts those donations from the application of the phase-out of itemized deductions for high-AGI taxpayers. A taxpayer must also elect to have contributions treated as qualified contributions under these provisions. This provision is also one of the few that does not require a connection with Hurricane Katrina. Any and all cash contributions made by an individual taxpayer made after August 27 through the end of the year qualify for exemption from the contribution base rule. In addition, the new law rewards those generous homeowners (and renters) with a special tax deduction for tax years beginning in 2005 or 2006. Individuals who use their principal residence to provide housing free of charge to evacuees (referred to as Hurricane Katrina displaced individuals) for at least 60 consecutive days may claim a special $500 deduction from taxable income for each evacuee residing in the taxpayer?s home. The deduction is capped at $2,000 total and may be claimed once for all tax years (which effectively limits it to providing shelter for four evacuees). The shelter also must be in the taxpayer?s principal residence. In addition, the evacuee?s principal place of residence must have been in the Hurricane Katrina disaster area as of August 28, 2005. Also, the statutory standard mileage reimbursement rate for charity work related to Hurricane Katrina has been increased from 14 cents per mile to 70 percent of the standard business mileage rate for the period beginning on August 25, 2005, and ending on December 31, 2006, rounded up to the next highest cent. The standard business mileage rate is 40.5 cents-per-mile through August 31, 2005. The standard business mileage rate is 48.5 cents-per-mile for the September 1 to December 31, 2005 period. Therefore, the new mileage rate for charity work related to Hurricane Katrina is 29 cents per mile during the period of August 25, 2005, through August 31, 2005. The new mileage rate for charity work, therefore, is currently 34 cents-per-mile from September 1 to the end of the year. It will be adjusted for 2006 once the IRS releases the 2006 mileage rates at a later date. Employer credits. A new tax credit is available to encourage small employers to keep employees on their payrolls. The credit is 40 percent of the first $6,000 in wages paid to each eligible employee after August 28, 2005, and before January 1, 2005, by employers located in the core disaster area, for the period the business is rendered inoperable as a result of damage caused by Hurricane Katrina. This credit is only available to small employers, defined as a business that employed an average of no more than 200 employees during the tax year. For all employers regardless of size, the Work Opportunity Tax Credit (WOTC), set to expire at the end of 2005, has been expanded to include a new target group for the WOTC, "Hurricane Katrina employees." A Hurricane Katrina employee is an individual whose principal place of residence was in the core disaster area on August 28, 2005. If a business employed a particular worker on August 28, however, it is ineligible for a WOTC for that worker. Employers must take the credit for an individual hired to work in a core disaster area by August 27, 2007; employers can take the credit for a displaced individual hired by December 31, 2005, regardless of where the employee works. The expiration date of the WOTC is waived for these employees. Deadlines extended. Taxpayers affected by Hurricane Katrina now have until February 28, 2006, to file tax returns and pay any taxes due. For taxpayers located in areas hardest hit by Katrina, the tax relief will be automatic and taxpayers will not need to do anything to get the extensions and other relief available. In areas where the Federal Emergency Management Agency has determined damage is more isolated, people will need to identify themselves to the IRS as hurricane victims. Taxpayers who believe they are entitled to relief should write "Hurricane Katrina" in red ink at the top of their returns and documents. More legislation coming. Sen. Max Baucus, ranking member of the Senate Finance Committee, predicted that the new law is just the beginning. "Additional legislation is being readied that will facilitate reconstruction, spur economic development and address the needs of the working poor." The Senate Finance Committee is scheduled to hold a hearing next week to revisit some of the provisions of the first Katrina tax package. With an estimated 214,000 workers having lost their jobs, addressing the massive unemployment problem caused by Hurricane Katrina is a top priority. Charitable and housing needs will also be reexamined, Baucus said. "As we continue to find more of the facts, we will take another look at expanding the tax relief of our first bill," Baucus said. "Next week's hearing will give us a better idea where help is needed the most." Meanwhile, check the IRS website (www.irs.gov) frequently for updates and specific tax information. The Internal Revenue Service continues to provide tax-related disaster assistance to victims of Hurricane Katrina. Those needing help with tax matters are encouraged to call the IRS at 1-866-562-5227. By Paul N. Gada, CCH Financial Planning Toolkit Staff Writer
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