In September Congress passed the Katrina Emergency Tax Relief Act of 2005 by a unanimous vote of 422 – 0. The legislation provides tax relief for individuals and families, along with incentives for charitable donations. Here is a summary of the main provisions:
Relief for individuals
- Persons displaced from their principal residence by Hurricane Katrina have the option of using their 2004 income to calculate the child credit and the earned income credit on their 2005 tax returns.
- Persons affected by the hurricane are not taxed on personal debt reduction or cancellation related to the hurricane, such as the cancellation of a mortgage, provided before 2007.
- Persons who provide rent-free housing to dislocated persons for at least 60 days are given a special tax deduction of $500 for each dislocated person housed in the individual’s principal residence (up to a maximum of $2,000). The deduction can be claimed in either 2005 or 2006, but cannot be claimed in both years with respect to the same person.
- Under current law, individuals who itemize their deductions may deduct personal casualty losses to the extent they exceed 10% of adjusted gross income and a $100 floor. The Act waives the 10% and $100 floors, allowing individuals to fully deduct their losses.
- Permits affected individuals to withdraw a maximum of $100,000 from their IRAs and pensions without paying the 10% penalty on early withdrawals. The Act also increases the limit on loans from pension plans from $50,000 to $100,000 for affected individuals.
Extension of tax deadlines
• The IRS took administrative action following the hurricane to extend the deadlines for filing tax returns and making tax payments until January 3, 2006. These extensions apply to income, estate and gift taxes for those affected by Hurricane Katrina. The Act extends the deadline until February 28, 2006, and applies this extension to employment taxes, in addition to income, estate and gift taxes.
Incentives for charitable donations
- Under current law, individuals may deduct charitable donations up to 50% of their adjusted gross income. Deductions for charitable donations are further limited by the phase-out of itemized deductions. Under the Act, cash donations to charities are exempt from the 50% income limitation and the phase-out of itemized deductions if the donations are made before January 2006.
- Under current law, corporations may deduct charitable donations up to 10% of their taxable income. The proposal waives the 10% income limitation for cash donations related to Hurricane Katrina if the donations are made before January 2006.
- Under current law, individuals may claim a tax deduction for the unreimbursed costs of using a personal vehicle for charitable work. The deduction is calculated by using a charitable standard mileage rate of 14 cents-per-mile. The Act sets the charitable mileage rate for charitable contributions at 70% of the standard business mileage rate (rounded to the next higher cent). The standard mileage rate for business is 48.5 cents-per-mile for the last four months of 2005. This provision is effective through December 31, 2006.
- For volunteers who are reimbursed for the use of their personal vehicle, the Act ensures that they do not have to pay income tax on the reimbursements. This provision is effective through December 31, 2006.
- Exempts from tax any reimbursements received by volunteers from tax-exempt organizations for the use of their personal vehicles in connection with providing relief relating to Hurricane Katrina victims through the end of 2006.
- Under current law, C-corporations may deduct the cost of food inventory donations. The value of the deduction is equal to the lesser of two times the basis or basis plus one-half of the added value. The proposal extends the current-law deduction for food donations to S-corporations, partnerships and sole proprietors through the end of the 2005 calendar year.
This article first appeared in Church Treasurer Alert, November 2005.