Hurricanes Cause Tax Law Changes

Jeanette A. Tucker  |  3/15/2006 3:23:20 AM

News You Can Use For March 2006

The Gulf Opportunity Zone Act of 2005 and the Katrina Emergency Tax Relief Act of 2005 provide certain tax breaks to help victims of hurricanes Katrina, Rita and Wilma.

The new laws alter the tax code to help individuals who suffered losses as a result of the hurricanes, according to LSU AgCenter family economics professor Dr. Jeanette Tucker. The laws also make it easier for individuals and companies to engage in charity to benefit those affected by the hurricanes, Tucker adds.

The Internal Revenue Service provides a full explanation of the new laws in Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma.

Tucker says that in general the legislation provides tax-favored early distributions and loans from retirement accounts, eliminates the limitations on claiming losses and permits certain earned income tax credit and refundable child tax credit recipients to choose either tax year 2005 or 2004 to determine their earned income and use the more beneficial result.

The Katrina Emergency Tax Relief Act allows affected individuals to exclude from income certain cancellations of debt and extends, from two years to five years, the replacement period for converted properties.

The Gulf Opportunity Zone Act provides educational assistance by expanding the Hope and Lifetime Learning credits for students enrolled and paying tuition at eligible educational institutions for tax years beginning in 2005 or 2006.

Twenty-three Louisiana parishes are included in these provisions: Acadia, Allen, Ascension, Cameron, Calcasieu, Beauregard, Evangeline, Iberia, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Plaquemine, Sabine, St. Landry, St. Martin, St. Mary, St. Tammany, Terrebonne, Vermilion, Vernon and West Baton Rouge.

Basically, the act expands the educational credits in two major areas. First, the Hope credit is expanded from a maximum of $1,000 per student to 100 percent of the first $2,000 in eligible expenses plus 50 percent of the next $2,000, for a maximum of $3,000. Second, the Lifetime Learning credit is expanded from 20 percent to 40 percent.

Removal of loss limitations. For taxpayers who suffered casualty or theft losses to property owned for personal use which are attributable to the storms, a recent change to the tax law removes certain loss limitations.

Recent legislation removes loss limitations for victims of hurricanes Katrina and Rita on losses of personal-use property, so that the entire amount of unreimbursed losses is deductible.

To qualify, a loss must have arisen in the disaster area after August 24, 2005 (Katrina) or September 22, 2005 (Rita) and must be attributable to the hurricane.

Cancellation of debt. Individuals living in the Hurricane Katrina disaster area on August 25, 2005, will not include in income a non-business debt that is cancelled, provided that the debt is not secured by property outside the Hurricane Katrina disaster area. Usually, the cancellation of debt is treated as income by the person for whom the debt is forgiven.

EITC and refundable child tax credit. Eligible individuals may choose to calculate their Earned Income Tax Credit (EITC) or refundable child tax credit using their earned income from the prior tax year.

They may choose to use their prior year’s earned income in calculating the EITC and the refundable Child Tax Credit if their 2004 earned income was higher than their 2005 earned income. Taxpayers eligible to make the choice should figure their EITC and refundable Child Tax Credit using their earned income for each year before making the choice to see which gives them the higher credits.

Katrina, Wilma and Rita victims can quickly access their 2004 earned income for these calculations at http://www.irs.gov/individuals/article/0,,id=151658,00.html.

As a security feature, taxpayers must enter the Social Security number and date of birth for the primary taxpayer listed on their 2004 federal return before retrieving this confidential information.

Retirement funds. The new law provides certain tax-favored treatment for early distributions, plan loans and recontributions.

To qualify for tax-favored treatment, the distribution must be made on or after Aug. 25, 2005, and before Jan. 1, 2007, from an eligible retirement plan such as a qualified plan or an IRA to an eligible individual – one whose main home was in the disaster area on Aug. 28, 2005 (Katrina) or September 23 (Rita) and who sustained an economic loss from the hurricane.

The total amount of tax-favored distributions an individual can receive from all plans, annuities or IRAs is $100,000.

An individual who receives these qualified retirement distributions does not have to pay the 10 percent additional tax on early distributions. The distributions generally are included in income taxed over a three-year period. However, if the individual recontributes a qualified distribution that is eligible for tax-free rollover treatment into an eligible retirement plan within three years, the distribution will be treated as though it were paid in a direct rollover.

Retirement plan loans. If the due date for any repayment on the loan occurs during the period beginning on Aug. 25 (Katrina) or Sept. 23(Rita) and ending on Dec. 31, 2006, the due date shall be delayed for one year. Any payments after the suspension period will be appropriately adjusted to reflect the delay and any interest accruing during the delay. Under the new law, the allowable loan amount for eligible individuals is increased from $50,000 to $100,000.

Recontributions to retirement plans. Qualified individuals who took a distribution, such as a hardship distribution from a 401(k) plan or 403(b) annuity or a qualified first-time homebuyer distribution from an IRA, to purchase or construct a home in the applicable disaster area but it was not purchased or constructed as a result of Hurricane Katrina could recontribute the funds to an eligible retirement plan. Any amount recontributed is treated as having been paid in a direct rollover.

Charitable donations. To encourage charity, the Katrina Emergency Relief Act suspends the limits on certain charitable contributions, creates an exemption for those housing Hurricane Katrina displaced individuals, increases the standard mileage rate for charitable use of vehicles and excludes from gross income mileage reimbursements to charitable volunteers.

Suspension of charitable limits. A deduction for qualified contributions by an individual is allowed up to the amount by which the taxpayer’s contribution base – adjusted gross income – exceeds the deduction for other charitable contributions. Contributions in excess of this amount are generally carried over to succeeding taxable years. For corporations, qualified contributions must be for relief efforts related to hurricanes Katrina, Rita or Wilma.

Qualified contributions are cash contributions made during the period beginning on August 28, 2005, and ending on Dec. 31, 2005, to a charitable organization.

The new law provides an additional exemption of $500 in taxable years 2005 and 2006 for each Hurricane Katrina-displaced individual claimed by the taxpayer. The total additional exemption claimed for all years cannot exceed $2,000 for married taxpayers filing jointly, $1,000 for married taxpayers filing separately or $2,000 for all other taxpayers.

The exemption with respect to a specific Hurricane Katrina-displaced individual may only be claimed one time by the same taxpayer for all taxable years. Additionally, if more than one taxpayer lives in the main home, only one of the taxpayers may claim the additional exemption.

To claim the additional exemption, the taxpayer must provide the taxpayer identification number of the displaced individual. The exemption is not allowed if the taxpayer receives any rent or other amount from any source in connection with the providing of housing for a displaced individual.

Standard mileage rate. For Aug. 25-31, 2005, the rate for miles driven for charities providing Hurricane Katrina relief is 29 cents for deduction purposes and 40.5 cents for reimbursement purposes.

For September through December 2005, the special Katrina-related rates are 34 cents for deductions and 48.5 cents for reimbursements.

For 2006, Katrina-related charitable rates are 32 cents per mile for deduction purposes and 44.5 cents per mile for reimbursement purposes.

For related family economics and consumer topics, click on the Family and Home link on the LSU AgCenter homepage, at www.lsuagcenter.com. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.

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On the Internet: LSU AgCenter: www.lsuagcenter.com

Source: Jeanette Tucker (225) 578-1425, or Jtucker@agcenter.lsu.edu

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