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Katrina Emergency Tax Relief Act of 2005 -- September 30,
2005
On September 23, 2005, President Bush signed into law the Katrina Emergency
Tax Relief Act of 2005 (KETRA) (HR 3768). The Act provides relief to
individuals and businesses impacted by Hurricane Katrina, as well as to
individuals and businesses helping in recovery efforts.
Increased flexibility, tax relief, and additional access to retirement
funds
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A qualified Hurricane Katrina
distribution will not be subject to the additional 10 percent early
withdrawal tax. |
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Individuals who take a qualified
Hurricane Katrina distribution can spread the resulting income ratably over
three years. |
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Individuals who take a qualified
Hurricane Katrina distribution may re-contribute the distribution to an
eligible retirement plan within three years. Any amount re-contributed
within the three-year period is treated as a rollover, and is not includible
in income. |
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The total amount of qualified
Hurricane Katrina distributions that an individual can receive from all
plans, annuities, or IRAs is $100,000. |
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Individuals who took qualified
distributions to purchase a home in the Hurricane Katrina disaster area may
re-contribute their distributions. |
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For qualified individuals, the
employer plan loan maximum is increased to the lesser of (1) $100,000 or (2)
the greater of $10,000 or the participant's accrued benefit under the plan
(qualified plan loans generally cannot exceed the lesser of (1) $50,000 or
(2) the greater of $10,000 or 50 percent of a participant's accrued
benefit). |
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For qualified individuals with an
outstanding employer plan loan, repayment due dates are delayed for one
year. |
Business tax credits
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The work opportunity tax credit rules
are amended to extend the credit to cover the employment of qualified
Hurricane Katrina employees. |
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A new employee retention tax credit
is created for small employers (200 employees or less, on average) in the
core disaster area. The credit is equal to 40 percent of qualified wages (up
to a maximum of $6,000 in qualified wages per employee) paid to an eligible
employee. |
Charitable deduction limits removed, new exemption amount allowed, and
charitable standard mileage rate increased
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Generally, an individual cannot take
a deduction for charitable contributions that exceed 50 percent of the
individual's contribution base (basically, the individual's adjusted gross
income). This limit will not apply to qualified Hurricane Katrina charitable
contributions. |
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The general limitation on itemized
deductions will also not apply to qualified Hurricane Katrina charitable
contributions. |
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For taxpayers who provide free
housing in their principal residence to persons displaced by Hurricane
Katrina, an additional exemption amount of $500 is allowed for each
"Hurricane Katrina displaced individual" (a maximum $2,000 is allowed). The
additional exemption is not subject to the income-based phaseouts applicable
to personal exemptions, and is allowed as a deduction in computing
alternative minimum taxable income. |
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For individuals who use a personal
vehicle in providing donated services to charity solely for relief related
to Hurricane Katrina, the charitable mileage rate is increased to 70 percent
of the business mileage rate in effect on the date of the contribution.
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Other tax relief provisions
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Generally, the discharge of a debt
results in taxable income. The Act, however, provides that amounts otherwise
includible in gross income by reason of the discharge of non-business debts
(in whole or in part) are not includible in the gross income of qualified
individuals impacted by Hurricane Katrina. |
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Personal casualty or theft losses
relating to Hurricane Katrina are not subject to the general $100 per
incident threshold or the general adjusted gross income limitation (such
losses are deductible without regard to whether aggregate net losses exceed
10 percent of a taxpayer's adjusted gross income). |
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In the case of property that is in
the Hurricane Katrina disaster area and that is compulsorily or
involuntarily converted on or after August 25, 2005, the replacement period
in which a taxpayer may replace converted property is extended from two to
five years. |
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Qualified individuals may elect to
calculate their earned income credit and refundable child credit for the
taxable year which includes August 25, 2005 using their earned income from
the prior taxable year. |
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In the case of taxpayers determined
to be affected by the Presidentially declared disaster relating to Hurricane
Katrina, any administrative relief from required acts, such as filing tax
returns, paying taxes, or filing a claim for credit or refund of tax shall
be for a period ending not earlier than February 28, 2006. |
For more details on KETRA please contact us.
Please note; this information has been
prepared from sources and data believed to be reliable but is not guaranteed by
Scott E. Bordelon, CFP, AAMS, Financial & Investment Management Advisors, Inc.,
or Mutual Service Corporation. While considerable effort has been expended to
verify it's accuracy, no representation or guarantee is made of its accuracy or
completeness. This data is provided for information purposes only and is not to
be construed as investment advice, tax advice, legal advice or an offer to buy
or sell securities. For specific investment advice, please call us for an
appointment or contact your tax or legal advisor for tax or legal advice.
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