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On Sept. 23, 2005, President George W. Bush signed into law the Katrina Emergency Tax Relief Act of 2005 (H.R. 3768). This new legislation provides $6.11 billion in short-term tax relief to hurricane victims and taxpayers who provide assistance to them. Additional legislation to address long-term concerns is still anticipated. TAX BREAKS FOR VICTIMS To help those affected by the storm, the new law provides several key provisions. Here are some of the provisions: � Additional time to act. While the Internal Revenue Service (IRS) had initially granted more time for taxpayers to take certain actions, the new law provides a blanket extension through Feb. 28, 2006, for filing tax returns, paying taxes or filing a claim for a credit or refund of tax. The suspension applies not only to income taxes, but also to all other federal taxes, including employment and excise taxes. � Retirement plan relief. The 10 percent early distribution penalty for those under age 59 and one-half who take withdrawals from qualified retirement plans and IRAs can be waived. The waiver is limited to withdrawals taken on or after Aug. 25, 2005, and before Jan. 1, 2005, for those with a principal place of abode on Aug. 28, 2005, in a designated disaster area. The maximum withdrawal eligible for relief is limited to $100,000. Withdrawals from 401(k) plans, 403(b) annuities or 457 government plans can be rolled back to accounts within three years to avoid all taxation (i.e., the usual 60-day rollover period is extended to three years); the usual 20 percent mandatory income tax withholding on these withdrawals does not apply. If withdrawals are not rolled back within this time, resulting income can be spread ratably over three years. Loans from qualified retirement plans can be made after Sept. 23, 2005, and before Jan. 1, 2007, to a person with a principal place of abode in the disaster area on Aug. 28, 2005, who sustained an economic loss. The loan limit can be up to $100,000 (rather than the usual $50,000 limit). For loans already outstanding on or after Aug. 25, 2005, repayments can be delayed for one year (i.e., the mandatory five-year repayment period can be extended to six years). � Other breaks include: � No income from the cancellation of indebtedness before 2007 by a commercial lender (e.g., forgiving a portion of a home mortgage). � Full deductibility for personal casualty losses. Katrina casualty losses are deductible separately from other casualty losses for the year and the usual 10 percent of adjusted gross income and $100 floors are waived. This new provision, suspending the 10 percent limit and the $100 rule, applies to Katrina-related personal casualty losses whether you deduct it in 2004 (in a presidentially declared disaster area) or 2005. � The casualty gain replacement period is extended to five years (rather than the usual two years for business and investment property and four years for personal residences). Thus, if insurance and other reimbursements exceed a taxpayer’s basis, resulting in gain, there is a longer period in which to obtain replacement property and postpone gain recognition. � Base refundable child tax credit and earned income credit on 2004 income. In order to prevent loss of tax benefits to low-income taxpayers, eligible persons can use last year’s income to figure these refundable credits if it produces a greater benefit than results from using 2005 income. TAX BREAKS FOR CONTRIBUTORSCash contributions. Cash contributions made on or after Aug. 28, 2005, and before Jan. 1, 2006, to a charitable organization (C corporations’ donations must be made for relief efforts related to Hurricane Katrina) can be claimed without regard to the usual income limitations if a special election is made for this purpose. Generally, current contributions for individuals are limited to 50 percent of adjusted gross income, while C corporations are limited to 10 percent of taxable income. � Housing displaced people. Those who provide housing for individuals displaced by the hurricane for at least 60 consecutive days can claim an exemption of $500 per person, up to a maximum exemption of $2,000 (four persons). The deduction is not subject to the usual phase-out for high-income taxpayers and is deductible for alternative minimum tax purposes (even though other personal exemptions are not deductible for this tax). This break applies in 2005 and 2006. � Increased mileage rate. Volunteers who drive their cars in relief efforts for hurricane victims can deduct 70 percent of the standard business mileage rate through 2006, rounded to the next highest cent. The business mileage rate is 40.5 cents per mile through Aug. 31, and 48.5 cents per mile from Sept. 1 through the end of the year (the rate can be adjusted in 2006). This means that the volunteer mile rate from Sept. 1 through Dec. 31, 2005, is 34 cents per mile. � Enhanced deduction for donations from inventory of books and food. The deduction, application to donations through the end of 2005, is the lesser of two times basis or basis plus one half of the fair market value in excess of basis. The food must be apparently wholesome and the book donations must be made by a C corporation to a public elementary or secondary school. OTHER TAX BREAKS Employers may be eligible for tax credits with respect to hurricane victims. For purposes of the work opportunity credit, a tax credit of 40 percent of first-year wages to an eligible employee up to $6,000, there is a new category of targeted (eligible) employee: Hurricane Katrina employee. This is someone with a principal place of abode on Aug. 28, 2005, in a disaster area. The usual certification requirements are waived as long as an employee can demonstrate eligibility to the employer. The credit applies to someone hired before the end of 2005 if the new place of employment is not in the core disaster area, or through Aug. 28, 2007, for those hired within the disaster area. Employers with 200 or fewer employees with a business in the disaster area that became inoperable can claim a tax credit for continuing to pay wages to disaster victims. The credit applies to wages paid to the earlier of resuming significant business operations or Dec. 31, 2005. More details are on the Web site of Congress’ Joint Committee on Taxation ( www.house.gov/jct). Sidney Kess, CPA-attorney, is a consulting editor to CCH Inc., an author and a lecturer.

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