News Releases
TAX ALERT
KATRINA EMERGENCY TAX RELIEF ACT
Dear Clients and Friends of the Firm:
As you probably have heard, Congress recently passed the Katrina Emergency Tax Relief Act of 2005 (“KETRA”). Besides providing tax breaks for individuals and businesses adversely affected by this devastating storm, KETRA contains a number of provisions that are more broadly applicable, specifically with respect to charitable giving.
Following is a summary of the Act’s key provisions. Rosen Seymour Shapss Martin & Company LLP (“RSSM”) offers this information to help you understand how KETRA may affect you or someone you know, and how you might take advantage of it to reduce your tax liability. Please contact us with any questions you may have about this new law or other tax matters.
CHARITABLE PROVISIONS
Increase in deductibility of cash contributions - The usual limit of 50% of adjusted gross income (“AGI”) will increase to 100% of AGI for cash contributions made to public charities from August 28, 2005, through the end of 2005.
Increase in charitable mileage allowance – To the extent that a vehicle is used for Katrina-related relief efforts, the charitable mileage rate will be 34 cents per mile. This higher rate, computed as a percentage of the standard business rate, is effective for charitable mileage starting August 29, 2005, through the end of 2006.
Additional exemption for providing housing – Homeowners and renters may take an additional exemption of $500 for each Hurricane Katrina displaced person (up to four people, up to a maximum of $2,000) that they provided housing for a period of at least 60 consecutive days. The housing must be the taxpayer’s primary residence to qualify, and the exemption may be claimed just once per displaced individual in either 2005 or 2006. Unlike other personal exemptions, this one is not subject to phase-out rules.
KATRINA-RELATED LOSSES
Discharge of indebtedness – Taxpayers may exclude from income any discharge of debt to the extent the discharge is attributable to Katrina-related damage. This is valid for debts discharged after August 25, 2005, through December 31, 2006.
Casualty losses – Individuals who suffer Katrina-related casualty losses are not subject to 10% AGI limitation or the $100 floor for deducting such losses.
RETIREMENT PLAN PROVISIONS
Waiver of penalty for early withdrawal – Katrina victims may take a distribution from their retirement plans – even if they are not 59 1/2 years old – without penalty. The distribution amount, however, is limited to $100,000, and the distribution must be made within one year of the declaration of the disaster area.
Repayment of qualified disaster relief distribution – During the three years following the time an individual takes a qualified disaster relief distribution, that individual may repay the amount and have the repayment treated as if it were a rollover contribution into the account. As such, affected individuals will be able to replenish their retirement accounts without being treated as having made an excess contribution to the account.
Taxability of withdrawals – Individuals who take a qualified disaster relief distribution will, unless they elect otherwise, be treated as having made the withdrawal ratably over a three-year period starting with the year in which the withdrawal is made.
BUSINESS-RELATED PROVISIONS
Donations of book inventories – Businesses can get a deduction for books contributed to qualified charities, but only if the books will be used by the charity for educational purposes. The deduction, subject to other limitations already in the law, is allowed for the lesser of the fair market value or twice the basis of the books contributed and applies to contributions made after August 28, 2005, through the end of 2005.
Donations of food inventories – A similar deduction will also be allowed for contributions of food inventory.
Work opportunity tax credit – A new class of targeted group – Hurricane Katrina employee survivor – was created for the Work Opportunity Tax credit. To qualify, the survivor must have lived, as of August 28, 2005, in a Katrina disaster area. This applies to an employee who begins work for an employer anytime between August 28, 2005 and December 31, 2005. In the case of a job at a location within a Katrina disaster area, the hiring period is expanded to the two-year period commencing on August 28, 2005.
Employee retention credit – Employers who employ less than 200 employees, located in a Katrina disaster area, whose businesses were inoperable for at least one day as a result of Katrina, qualify for a 40% tax credit on the first $6,000 of wages paid to eligible employees. Qualified wages include those paid on any date after August 28, 2005 and before January 1, 2006 the business first became inoperable until such time as the business resumes significant operations at the location. The credit is available through 2005.
This latest tax act comes on the heels of several others over the past few years. Congress is considering a variety of additional tax legislation. Therefore, more tax law changes may occur soon.
To help you understand how all these changes affect you and how you might take advantage of them to reduce your tax liability, we would welcome the opportunity to discuss them with you. Please contact us at 212-303-1800 or e-mail us at info@rssmcpa.com and let us know how we can be of assistance.
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