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CLIENT ALERT
For additional information contact:
Andrea Kriznauski
Marketing Coordinator
akriznauski@untracht.com
November 10, 2005
Katrina Emergency Tax Relief Act Of 2005
Recently, Congress passed the Katrina Emergency Tax Relief Act of 2005. The new law gives Hurricane Katrina victims - individuals and businesses - temporary tax breaks scored by the Joint Committee on Taxation at over $6 billion.
The following are provisions that affect all taxpayers:
Charitable Contributions
Individuals
Generally, for individuals, contributions to tax-exempt charitable organizations are limited to 50 percent of the taxpayer's contribution base (adjusted gross income) for the tax year. Any excess amount may be carried over for a period of up to five years. The new law removes the 50 percent limitation for all cash donations to public charitable organizations for the period beginning on August 28, 2005, and ending on December 31, 2005. Under the provision, an individual's deduction for qualified contributions is allowed up to the amount by which the taxpayer's contribution base exceeds the deduction for other charitable contributions. Contributions in excess of this amount are carried over to succeeding tax years. The provision also exempts those donations from the application of the phase-out of itemized deductions for high-AGI taxpayers. An election must be made to have these contribution provisions apply.
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This provision is one of the few that does not require a connection with Hurricane Katrina. Any and all cash contributions made by an individual taxpayer to public charities made after August 27th through the end of the year qualify for exemption from the contribution base rule.
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Corporate donations
The charitable contribution deduction for a corporation is generally limited to 10 percent
of its taxable income for the year in which the contribution was made. Excess amounts may be carried over for up to five years, but deductions in those years are also subject to the maximum limitation. The new law waives the 10 percent limitation for Hurricane Katrina only cash donations made by corporate donors to public charitable organizations during the period beginning on August 28, 2005, and ending on December 31, 2005. The corporation's qualified contributions must be for relief efforts related to Hurricane Katrina and the corporation must elect to have the provisions apply. The corporation must substantiate that the contribution is made for Hurricane Katrina relief efforts. (This is not required for individual taxpayers.)
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Impact. This additional incentive would cover, for example, corporate employers that are matching donations made by employees to relief organizations.
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Other Assistance
Americans have opened their homes in unprecedented numbers to give shelter to evacuees.
| Example. Kim lives in Memphis. She opens her home to five evacuees from New Orleans, Antonio, Isabel, and their three children. Antonio, Isabel, and their children arrive at Kim's home on September 29 and stay rent free with Kim until December 26. Kim may claim the special $500 deduction for four of her evacuee-houseguests, up to the maximum $2,000.
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The new law rewards those generous homeowners (and renters) with a special tax deduction for tax years beginning in 2005 or 2006. Individuals who use their principal residence to provide housing free of charge to evacuees (referred to as Hurricane Katrina displaced individuals) for at least 60 consecutive days may claim a special $500 deduction from taxable income for each evacuee residing in the taxpayer's home. The deduction is capped at $2,000 total and may be claimed once for all tax years (which effectively limits it to providing shelter for four evacuees). The shelter also must be in the taxpayer's principal residence. In addition, the evacuee's principal place of abode must have been in the Hurricane Katrina disaster area as of August 28, 2005. The income-based phase outs applicable to other exemptions do not apply to the special Hurricane Katrina exemption.
Although a charitable deduction generally cannot be taken when donations are given directly
to a person rather than a charitable organization, many individuals are opening their homes to strangers selected and sent by a particular charitable organization. Those individuals may be able to take charitable deduction for rental value and food given to their houseguests as a donation to the organized charity. In that case, the charity must complete the proper substantiation paperwork needed for a deduction. The double benefit of a charitable deduction and a $500 exemption, however, is unlikely, based on legislative language that denies the exemption if the taxpayer receives any rent or other amount "from any source" in connection with providing the housing.
Extended tax deadlines
After Hurricane Katrina hit the Gulf Coast, the IRS extended tax filing and payment deadlines to January 3, 2006. Congress is now giving affected taxpayers even more time. Qualifying taxpayers have until February 28, 2006, to file any returns and pay taxes for any period that had not expired before August 25, 2005.
Please contact us to further discuss these provisions and their applicability to your specific tax circumstances.
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