THE HURRICANE KATRINA EMERGENCY TAX RELIEF ACT OF 2005
Washington acted in record fashion to craft a tax relief bill for Hurricane Katrina victims. This bill was passed unanimously by both houses of Congress on September 21, 2005, and is expected to be signed by the President soon.

Another bill to provide economic stimulus is expected, which could include depreciation and expensing relief and enhanced loss carrybacks.

Tax relief is discussed below in three geographic areas –

1. Those for all U.S. taxpayers,

2. Those in the core disaster area, defined as –

a. Louisiana parishes – Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Pointe Coupee, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John, St. Mary, St. Martin, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge, and West Feliciana.

b. Mississippi counties - Adams, Amite, Attala, Claiborne, Choctow, Clarke, Copiah, Covington, Franklin, Forrest, George, Greene, Hancock, Harrison, Hinds, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston, and Yazoo.

c. Alabama counties - Baldwin, Choctaw, Clarke, Greene, Hale, Mobile, Pickens, Sumter, Tuscaloosa, and Washington.

3. And those in the Hurricane Katrina disaster area, defined as all of the above core disaster area plus –

a. Louisiana parishes – Allen, Avoyelles, Beauregard, Bienville, Bossier, Caddo, Caldwell, Catahoula, Claiborne, Concordia, Desoto, East Carroll, Evangeline, Franklin, Grant, Jackson, LaSalle, Lincoln, Madison, Morehouse, Natchitoches, Ouachita, Rapides, Red River, Richland, Sabine, St. Landry, Tensas, Union, Vernon, Webster, West Carroll, and Winn.

b. Mississippi counties – Alcorn, Benton, Bolivar, Calhoun, Carroll, Chickasaw, Clay, Coahoma, DeSoto, Grenada, Holmes, Humphreys, Issaquena, Itawamba, Lafayette, Leflore, Lee, Marshall, Monroe, Montgomery, Panola, Pontotoc, Prentiss, Quitman, Sharkey, Sunflower, Tallahatchie, Tate, Tippah, Tishomingo, Tunica, Union, Washington, Webster, and Yalobusha .

c. Alabama counties – Bibb, Colbert, Cullman, Jefferson, Lamar, Lauderdale, Marengo, Marion, Monroe, Perry, Wilcox, and Winston.

d. Florida counties - Monroe, Broward, Miami-Dade, Bay, Collier, Escambia, Franklin, Gulf, Okaloosa, Santa Rosa, and Walton.

Tax provisions affecting all U.S. taxpayers
1. Increased charitable contribution limits . The historical deductions on charitable contributions remain (up to 10% of income for C corporations, and up to 50%, 30%, or 20% of adjusted gross income for individuals, depending on the type of contribution). Those limits continue to apply for contributions. However, certain qualified contributions can be deducted in addition to these limits, up to 100% of income.  Qualified contributions are –

a. cash contributions only (not securities or property),

b. made in the period beginning 8/28/2005 and ending 12/31/2005, and

c. for which the taxpayer has elected to be a qualified contribution.

Payments to a new or existing donor-advised fund are not eligible.

These additional qualified contributions are not subject to the phase-out of itemized deductions.

For “C” corporations, qualified contributions must be made for relief efforts related to Hurricane Katrina.  Other taxpayers have no such additional requirement.

2. Charitable mileage rate.  For those who use a vehicle for a charity in relief for Katrina from 8/25/2005 to 12/31/2006 can compute their mileage using a rate of 70% of the business mileage rate at that time, rather than the statutory $0.14 per mile.  Note that this provision does not change the statutory $0.14 rate for non-Katrina charitable mileage, or for any mileage after 12/31/2006.

a. For Katrina charitable mileage from 8/25/2005 to 8/31/2005, the business rate was $0.405, so the charitable rate is $0.29.

b. For Katrina charitable mileage from 9/1/2005 to 12/31/2005, the business rate was $0.485, so the charitable rate is $0.34.

c. For Katrina charitable mileage from 1/1/2006 to 12/31/2006, the rate is currently not determined.

3. Charitable mileage reimbursed.  Where charitable mileage for Katrina relief from 8/25/2005 to 12/31/2006 is reimbursed, the reimbursement is not income.  The reimbursement is allowed up to the standard business mileage rate (currently $0.485), and if properly documented.

4. Additional exemptions.  Individuals may claim an additional $500 tax exemption in 2005 and 2006 if they provide at least 60 days of temporary rent-free housing to a person dislocated by Katrina.  The limit is $2,000, and cannot be claimed in both years for the same dislocated persons.  This exemption is not subject to phase-out and is allowed for the alternative minimum tax.

5. Food donations.  Food carried as inventory is allowed as a charitable contribution at its basis only (not fair market value).  For C corporations only, the deduction is the lesser of twice the basis, or basis plus one-half the appreciation.  This law extends this special C corporation treatment to all us taxpayers for food donations after 8/28/2005 and before 1/1/2006.  This deduction is limited to 10% of trade of business income.

6. Book donations.  Contributions of books carried at inventory are allowed the same enhanced deductions as food (above) if given to a public school after 8/28/2005 and before 1/1/2006.

7. Work opportunity credit expanded.  This credit is designed to provide tax credits to employers who hire from certain targeted groups.  The credit is generally 40% of the first $6,000 paid to someone who on 8/28/2005 had a principal residence in the core disaster area and is hired anywhere in the U.S., in the period beginning 8/28/2005 and ending 12/31/2005.

Tax provisions affecting those in the Hurricane Katrina disaster area (“HKDA”)
1. Qualified Katrina retirement distributions.  This is a distribution from an eligible plan up to $100,000, paid after 8/25/2005 and before 1/1/2007, to a taxpayer whose principal residence on 8/28/2005 was in the HKDA, who sustained an economic loss due to Katrina.  This distribution –

a. Is exempt from the 10% penalty for premature distributions,

b. Is included in income ratably over three years unless the taxpayer elects out, and

c. Can be rolled back into an eligible plan during the three-year period beginning with the distribution date.

An eligible plan is an IRA, a 403 or 408(b) retirement annuity, a 401(a) qualified retirement plan (which includes a 401(k) plan), or a 457(b) deferred compensation plan.

Also, mandatory income tax withholding does not apply to qualified Katrina distributions.

2. Retirement withdrawals for home purchase.  If a taxpayer took a hardship distribution from a retirement plan, or a first-time homebuyer IRA distribution after 2/28/2005 and before 8/29/2005, for the purpose of acquiring a home in the HKDA, but the home construction or acquisition was cancelled due to Katrina, this distribution can be rolled back into the plan by 2/28/2006 without tax consequence or penalty.

3. Retirement plan loans.  The amount limits on loans to Katrina victims is increased from $50,000 to $100,000.  The time for repaying the loans have generally been extended by one year.

4. Retirement plan amendments.  This provision affords retirement plans additional time to be amended to stay in conformity with tax law requirements.

5. Casualty losses.  Generally, casualty losses are allowed as an itemized deduction to the extent they first exceed $100, and then exceed 10% of adjusted gross income.  For those with Katrina-related casualty losses in the HKDA, both of these tests are removed.

6. Involuntary conversions.  The replacement period for property lost due to a Katrina-related involuntary conversion is extended from two to five years, if both the lost property and the replacement property are in the HKDA.

7. Refundable credits.  Advance refundable earned income credits or refundable child tax credits for 2005 can be based on 2004 income.

8. Tax deadlines.  The IRS had already taken administrative action to extend certain income, excise, employment, estate, and gift tax deadlines to 1/3/2006.  This law further extends it to 2/28/2006.

9. Debt relief.  Those who suffered an economic loss due to Katrina and are relieved of nonbusiness indebtedness after 8/25/2005 and before 1/1/2007 will not be taxed on that relief.

Tax provisions affecting those in the core disaster area
1. Work opportunity credit expanded.  This credit is designed to provide tax credits to employers who hire from certain targeted groups.  The credit is generally 40% of the first $6,000 paid to someone who on 8/28/20005 had a principal residence in the core area and is hired in the two-year period beginning on 8/28/2005 for employment in the core area.

2. New employee retention credit.  Provides a credit of 40% of the first $6,000 in wages from a qualified employer to a qualified employee.

a. A qualified employer is one –

i. who conducted an active trade or business on 8/28/2005 in the core area,

ii. whose business is inoperable on any day after 8/28/2005 and before 1/1/2006 due to Katrina damage, and

iii. who employed less than 200 employees (on average during the tax year).

b. A qualified employee is one who had a principal residence in the core area on 8/28/2005.