Hurricane Katrina dealt a serious blow to the Gulf Coast and New Orleans. Not only was the storm responsible for the loss of hundreds of human lives, initial estimates fall in the range of $40 to $60 billion in damage and property losses.
The federal government responded to Katrina and its aftermath with increased federal spending and new legislation for tax relief. On September 23, President Bush signed into law H.R. 3768, the Katrina Emergency Tax Relief Act of 2005.
Despite its title, the act provides relief not only to those taxpayers in the parishes and counties designated as disaster areas by the president, but some provisions provide relief to taxpayers outside the affected areas. The act addresses three types of taxpayers.
- Taxpayers whose principal residence was in one of the parishes or counties with respect to which a major disaster has been declared by the president under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina
- Taxpayers in the core disaster area, including that portion of the disaster area determined by the president to warrant either individual or individual and public assistance from the federal government
- Taxpayers outside the disaster area
The Joint Committee on Taxation issued a technical explanation of the new act. The key provisions of the act are as follows.
Tax-favored withdrawals from retirement plans
For those whose principal residence on August 28, 2005 was located in a hurricane disaster area and sustained an economic loss, the provision provides an exception to the 10 percent early-withdrawal penalty of a qualified Hurricane Katrina distribution, up to $100,000, from a qualified retirement plan, a 403(b) annuity or an IRA. In addition, the taxpayer can include the distribution as income ratably over three years.
Also under the provision, any portion of a qualified distribution may be recontributed within three years, starting the day after the date the distribution was received, to an eligible retirement plan and treated as a rollover. An individual may file an amended return to claim a refund of the tax attributable to the amount previously included in income.
Work-opportunity tax credit for Hurricane Katrina employees
Under present law, the work-opportunity tax credit is available on an elective basis for employers hiring individuals from one or more of eight targeted groups. The credit equals 40 percent of qualified first-year wages (not in excess of $6,000). Therefore, the maximum credit per full-time employee is $2,400.
The new act provides that a Hurricane Katrina employee is treated as a member of a targeted group for purposes of the work opportunity credit. A Hurricane Katrina employee is an individual who had a principal residence in the core disaster area and either is hired during a two-year period within the core disaster area or was displaced by Hurricane Katrina and is hired outside the core disaster area by December 31, 2005.
For individuals, the amount deductible as a charitable contribution is limited to a percentage of the taxpayer’s adjusted gross income (AGI). Under the new law, qualified contributions in excess of the AGI limitation will be allowed, up to 100 percent of the taxpayer’s AGI. Any amounts in excess of the limitation are carried over to succeeding taxable years.
Removal of the casualty loss limitation
The Katrina Emergency Tax Relief Act of 2005 removes two limitations on personal casualty or theft losses to the extent that those losses arise in the Hurricane Katrina disaster area on or after August 25, 2005 and are attributable to Hurricane Katrina. The loss need not exceed $100 per casualty and the losses are deductible without regard to whether net losses exceed 10 percent of a taxpayer’s adjusted gross income.
The Katrina Emergency Tax Relief Act of 2005 offers many more key provisions to help the victims of Hurricane Katrina and also to those outside the disaster area. Please consult your tax adviser to see if any apply to you.
Chad Kidney (firstname.lastname@example.org) works in the tax department at Tauber & Balser PC. He has more than seven years of experience, with a concentration in taxation with small- to mid-sized companies. He has also developed knowledge in cost segregation studies. Reach him at (404) 261-7200.
Numerous provisions of each act and their effective dates add more complexity to the tax law. The following is a summary of the most important changes and their effects on individuals and businesses.
* Section 179 expense. Section 179 of the Internal Revenue Code permits taxpayers to expense furniture and equipment in a business. The 2002 tax act increased the threshold $25,000, to $100,000. The $100,000 limit was set to expire at the end of last year, but the new tax law extended the $100,000 limit until Dec. 31, 2007, and indexed it for inflation beginning in 2004. The maximum expense for 2004 is $102,000.
* SUV loophole closed. Prior to Oct. 22, 2004, a taxpayer could purchase a business vehicle weighing more than 6,000 pounds and deduct up to $100,000 ($102,000 for 2004) of its cost. Beginning in 2005, a taxpayer who purchases a new SUV with a gross vehicle weight of more than 6,000 pounds and less than 14,000 pounds will be limited to a deduction of $25,000.
* New 15-year recovery period. This allows qualified leasehold improvements and restaurant property placed in service after Oct. 22, 2004, and before Jan. 1, 2006, to be expensed over a 15-year period. Pre-law rules required a 39-year write-off period.
S Corporation reform
* One shareholder. A new election may be made to treat all family members that are shareholders in an S-Corporation as one shareholder.
* Maximum number of shareholders. The permissible number of shareholders increases from 75 to 100.
* Suspended losses can be transferred. S Corporation losses that were suspended due to the basis limitation rules can be transferred to a spouse or former spouse in divorce.
Other important changes
* Vehicle donations. The new law dramatically limits the deduction for vehicles contributed to charity. If the charity sells the vehicle without using it in any significant way or without improving it, the amount of the charitable deduction for the taxpayer cannot exceed the gross proceeds from the sale. If the charity keeps the vehicle for its own use, it must give a value for the donation to the taxpayer.
* State sales tax deduction. For taxpayers that itemize their deductions, the new law allows individuals to deduct state and local sales tax instead of deducting state and local income taxes. This new deduction will benefit taxpayers who live in states without an income tax or taxpayers in any state in which sales taxes paid during the year exceeds their state income tax liability.
* Child credit. Parents of children under age 17 can continue to claim a $1,000 child tax credit per child through 2010. This extends the old law that would have expired in 2005.
* Start-up expenses. Up to $5,000 of start-up expenditures is deductible in the year a new trade or business begins. The remaining costs are amortized over 180 months.
The above items are just some of the changes in the tax law from the Working Families Tax Relief Act of 2004 and American Jobs Creation Act of 2004. Consult with a certified public accountant to find out how the new laws may affect you.
Chad Kidney (email@example.com) works in the tax department at Tauber & Balser P.C. He has more than seven years of experience, with a concentration in taxation with small to mid-sized companies. He has also developed knowledge in cost segregation studies. Reach him at (404) 261-7200.