[StBernard] 2005 Tax Relief

[Westley Annis]

Katrina Tax Relief Act in Plain English
Friday, September 23, 2005
By Gail Buckner, CFP

 Dear Friends,
The "Katrina Emergency Tax Relief Act of 2005" is aimed at helping
residents in the hurricane-ravaged areas of Louisiana, Mississippi, and
Alabama rebuild their homes and lives as quickly as possible. Here's a
rundown of the major provisions:


No Change in Tax Filing Status Due to Relocation:


Hurricane victims who have been forced to live with friends, relatives, or
in other kinds of temporary housing will not lose various tax benefits due
to the change in their living situation. To avoid this, they will be
allowed to use their 2004 income to calculate their eligibility for such
things as the child tax credit and the Earned Income Tax Credit for 2005.


If you filed as "Head of Household" in 2004, you can do so for 2005 even if
you are now living in someone else's home because yours was damaged by the
storm.


Tax Break for Those Providing Temporary Housing


Anyone providing rent-free housing to Hurricane Katrina victims for at
least 60 days will be able to take a tax deduction of $500 per person. The
maximum deduction is $2,000.


No Tax on Debt Relief


Under the regular tax rules, if a creditor forgives your debt, this is
considered income and the amount is subject to tax. Under this Act, if a
debt - such as your mortgage - is cancelled as a result of the hurricane
you will not have to pay income tax on this.


Losses are Fully Deductible


Normally, casualty losses are only deductible to the extent they exceed 10
percent of your adjusted gross income (AGI). In addition, the first $100 of
this amount is disallowed. For instance, if your AGI were $80,000 and
Katrina caused $50,000 in damages to your home, you'd only be able to
deduct $41,900 ($50,000 - 8,000 - 100). However, Katrina victims will be
allowed to deduct 100 percent of their hurricane-related losses.


Deadline for Using Insurance Proceeds Extended


In order to avoid tax on insurance payments, the money must be used to
replace damaged or lost property. Businesses have two years to reinvest the
money; individuals have four. In both cases, the deadline is extended to
five years provided the replacement property "is located within the
disaster area."


Expanded Low-Interest Mortgages


While states and local government entities can issue bonds to raise money
for mortgages to lower-income homebuyers, this Act removes the requirement
that the individual be a "first-time" home purchaser. It also permits loans
of up to $150,000 for the purpose of repairing <existing> homes in the
declared disaster area.


Penalty-Free Retirement Plan Withdrawals


Katrina victims who withdraw money from their company retirement plans or
IRAs in order to make repairs or pay bills will not be hit with the usual
10 percent early withdrawal penalty even if they are under age 59 1/2. The
maximum withdrawal is $100,000. In addition, these individuals can spread
the income tax on these withdrawals over three years instead of having to
pay the entire amount in the year of the distribution.


If your company retirement plan offers "hardship" loans, the maximum amount
is temporarily increased from $50,000 to $100,000.


Tax Deadlines Extended


Individuals who were supposed to submit income, estate, or gift taxes will
now have until Feb. 28, 2006 to do so. This includes filing tax returns and
making estimated payments.


Incentives for Charitable Contributions


People who donate cash to a bona fide charity supporting Hurricane Katrina
relief efforts will be able to deduct the entire amount. Normally, the
amount you can deduct is limited to 50 percent of your AGI. This is further
reduced because itemized deductions are phased out at higher income levels.


This measure also waives the 10 percent income limitation on corporate
donations to charity.


As a result of this Act, individuals or corporations that make charitable
contributions in cash will be able to deduct 100 percent of the amount,
provided the donation is made before Jan. 1, 2006.


Tax Break for Using Your Personal Vehicle


Volunteers who use their own car or truck in their charitable work can
deduct 14 cents per mile - much less than the 48.5 cents per mile that the
I.R.S. just approved for business use.


Through the end of this year, this Act raises the mileage deduction for
Katrina aid workers to 34.2 cents per mile. It further states that if a
volunteer is reimbursed for his mileage by the charity, he will not have to
pay income tax on this amount.


Donations of Food or Books


Subject to certain limitations, C-corporations that donate food to charity
can deduct the value. Under this measure, other types of business entities,
such as S-corporations, partnerships and sole proprietors, can receive the
same tax break.


An entity that donates educational materials to schools in the
hurricane-affected area will be able to deduct this contribution.


In both cases, the food or books must be donated by the end of this year in
order to qualify for this special tax break.


Tax Incentives for Employers


There are a number of tax breaks for companies that employ Katrina victims.
For instance, the "Work Opportunity Tax Credit" (WOTC), which gives
employers a tax credit for hiring individuals in certain target groups, has
been expanded. It now includes anyone who lived in the area that is
eligible for assistance under something called the "Stafford Act."


Employers <within> the assistance area can claim the credit for the next
two years. Companies outside the area are also eligible for the credit if
they hire WOTC individuals from the declared disaster area before the end
of this year.


Small Business Tax Credit


Companies in the Katrina disaster area with 200 or fewer employees are
eligible for a tax credit of up to $2,400 for each employee they keep on
the payroll. This is available even if the employee is working at another
facility.


Long-Term Relief Package to Come


As it did for New York City following the 9/11 Terrorist Attacks, Congress
is expected to pass additional, longer-lasting tax breaks to help New
Orleans and the rest of the declared Katrina disaster area recover.


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The views expressed in this article are those of Ms. Buckner or the
individual commentator. You should consult your own financial adviser for
advice regarding your particular financial circumstances. This article is
for information only and is not an offer of the sale of any mutual fund or
other investment.