Katrina Tax Relief
A Summary of Provisions for Affected
Individuals, Businesses, and Charitable Donors
Rebecca Carr and Tina Quinn
2006 - When Hurricane Katrina hit the Gulf Coast with a vengeance
in August 2005, Congress acted to provide tax relief for its
victims with the Katrina Emergency Tax Relief Act of 2005.
It passed both houses of Congress by a unanimous vote, and
President Bush signed the act into law on September 23, 2005.
act provides special rules for use of retirement funds,
employment relief, charitable-giving incentives, and additional
tax relief provisions. In addition to providing relief to
individuals and businesses, the act includes tax breaks
for relief workers. Section 501 of the act declared an emergency
requirement so the need for balancing of revenues and expenditures
is suspended. Advisors should familiarize themselves with
the act’s provisions and make efforts to determine
who can benefit from it.
act defines the “Hurricane Katrina disaster area”
as the area declared a major disaster area by the President
before September 14, 2005. The “core disaster area”
means that part of the Hurricane Katrina disaster area that
warrants individual or public assistance from the federal
government. The IRS has designated 31 Louisiana parishes,
47 Mississippi counties, and 10 Alabama counties as part
of the core disaster area. (See www.irs.gov.) In addition,
33 Louisiana parishes, 35 Mississippi counties, 12 Alabama
counties, and 11 Florida counties make up the remainder
of the Hurricane Katrina disaster area.
I of the act provides special rules relating to the use
of retirement funds for relief relating to Hurricane Katrina.
Section 101 allows an eligible individual to withdraw up
to $100,000 (in the aggregate) from retirement plans [e.g.,
IRA, 401(k)] without paying the 10% early-withdrawal penalty.
In addition, these funds are not subject to the usual 20%
mandatory withholding on withdrawals. Eligible individuals
may pay income tax on the withdrawn amounts ratably over
a three-year period. Also, if the withdrawals are recontributed
to the plan within three years, the amounts will be given
rollover treatment. If the taxpayer has previously filed
a tax return and declared the withdrawals as income, he
may file an amended return to get a refund. Eligible individuals
are those whose principal place of abode on August 28, 2005,
was located in the Hurricane Katrina disaster area and who
suffered an economic loss from Hurricane Katrina.
102 allows recontributions of qualified distributions from
retirement plans for home purchases cancelled due to Katrina.
These distributions must have been made after February 28,
2005, and before August 29, 2005. The recontributions will
be treated as rollovers if made between August 25, 2005,
and February 28, 2006. The funds from a qualified distribution
must have been intended for the purchase or construction
of a principal residence in the Hurricane Katrina area,
and the purchase or construction could not take place because
of Hurricane Katrina. Eligible individuals are those whose
principal place of abode on August 28, 2005, was located
in the Hurricane Katrina disaster area and who suffered
an economic loss from Hurricane Katrina.
103 increases the loan limit from a qualified employer plan
from $50,000 to $100,000 for qualified individuals if the
loan takes place after September 23, 2005, and before January
1, 2007. For the purposes of this section, a qualified individual
is one whose principal place of abode on August 28, 2005,
was located in the Hurricane Katrina disaster area and who
suffered an economic loss from Hurricane Katrina. This section
also, under certain circumstances, delays the due date for
repayments due after August 24, 2005, and before December
104 enumerates the rules for retroactive application of
amendments made by this title or by regulation to existing
retirement or annuity contracts.
201 extends the Work Opportunity Tax Credit to make Hurricane
Katrina employees a targeted group. Unlike the traditional
groups covered by the Jobs Credit, many of the employees
are very employable. The credit is 40% of the first $6,000
of wages paid to the qualified employees.
the purposes of section 201, the term “Hurricane Katrina
employee” includes two groups. The first includes
any individual who on August 28, 2005, had a principal place
of abode in the core disaster area and who is hired during
the two-year period beginning on that date for a position
in the core disaster area. The second group includes individuals
who lived in the core disaster area and were displaced by
reason of Katrina. An individual in this group must be hired
by December 31, 2005, but need not be hired for a position
in the core disaster area.
do not need to obtain the certificate required under subparagraph
(A) of IRC section 51(d)(12) for claiming the Work Opportunity
Credit for other targeted groups. The employee will provide
reasonable proof that he is a Hurricane Katrina employee
to the employer.
202, an employee-retention credit for small employers affected
by Hurricane Katrina, allows employers of less than 200
workers to receive a tax credit of 40% on up to $6,000 of
continuing payments made to eligible workers during the
period of their business inoperability. An eligible employer
is one within the core Katrina area whose business was inoperable
for at least one day. This credit applies regardless of
whether the employee performs no services, performs services
at a different location, or performs services at the principal
place of employment prior to resumption of significant operations.
An eligible employee is one whose principal place of employment
on August 28, 2005, was with this employer in the core disaster
area. This credit will be part of the general business credit
under section 38(b) of the IRC of 1986.
III includes provisions to encourage charitable giving.
Section 301 suspends the income percentage limits on cash
charitable gifts for both individuals and corporations applicable
to gifts given between August 28, 2005, and December 31,
2005. In the case of corporations, charitable gifts must
be made to relief efforts pertaining to Hurricane Katrina.
For individual taxpayers, the cash must simply be given
to a section 170(b)(1)(A) organization other than a section
509(a)(3) organization. In addition, individual taxpayers
will not be subject to the 3% of adjusted gross income (AGI)
phase-out of itemized deductions under IRC section 68.
will have to separate on their tax returns the amount of
charitable contributions made prior to August 28, 2005,
and those taken on August 28, 2005, or later.
allowance to take all of the contribution currently is an
election. In the case of a partnership or an S corporation,
the election is to be made by at the partner or shareholder
level. Note that this is available to all taxpayers, not
just those economically affected by Hurricane Katrina.
302 allows an additional reduction of $500 of taxable income
for taxpayers housing Katrina victims. For a taxpayer to
qualify for the exemptions, a Hurricane Katrina–displaced
individual must live in the taxpayer’s home rent-free
for a period of at least 60 consecutive days after August
28, 2005. The taxpayer is limited to four such exemptions
($2,000 maximum). The person for whom the exemption is earned
may not be the taxpayer’s spouse or a dependent of
the taxpayer. The exemption will be disallowed if the taxpayer
receives rent or other compensation for providing the housing,
whatever the source of the compensation.
taxpayer must include the taxpayer identification number
of the Katrina victims on the tax return to be entitled
to the exemption. A person is a Hurricane Katrina–displaced
individual if such person lived in the Katrina disaster
area and her place of abode was damaged or the person was
evacuated from her home due to Katrina. This exemption will
be available for tax years beginning in 2005 and 2006, but
the taxpayer may use the exemption in only one of those
303 increases the standard mileage rate for charitable use
to 70% of the standard business rate in effect at the time
of the charitable use, if the use pertains to providing
relief relating to Hurricane Katrina. Any increase may be
rounded up to the next highest cent. The mileage rate increase
begins on August 25, 2005, and ends on December 31, 2006.
(For 2005 this means that at least two different rates apply.
The federal mileage rate was 40.5 cents on August 25, 2005,
and increased to 48.5 cents on September 1, 2005. So the
rate will be 29 cents beginning on August 25, 2005, and
increase to 34 cents on September 1, 2005.)
304 allows charitable volunteers to exclude mileage reimbursements
from gross income if such use is in connection with Hurricane
Katrina relief. This does not apply to persons who receive
compensation for their services. Also, “double-dipping”
is not allowed: If a person receives a mileage reimbursement
that is excluded from income under this section, he cannot
take a deduction or credit from gross income with respect
to such mileage. The mileage exclusion begins on August
25, 2005 and ends on December 31, 2006.
305 allows an enhanced charitable deduction for contributions
of food inventory made between August 28, 2005, and December
31, 2005. This deduction may be taken by any trade or business,
as long as the food is “apparently wholesome food.”
The enhanced deduction will be the lesser of the basis plus
50% of the property’s appreciated value, or two times
basis. Taxpayers other than C corporations are limited to
an aggregate deduction for food of 10% of the taxpayer’s
aggregate net income. Section 305 defines “apparently
wholesome food” as that considered such under the
Bill Emerson Good Samaritan Food Donation Act. Therefore,
it must be fit for human consumption and meet all quality
and labeling standards of government. The food need not
be donated for Hurricane Katrina use, but must meet the
normal donee use under IRC section 170.
306 allows an enhanced charitable deduction for contributions
of book inventories to public schools. The enhanced deduction
will be the lesser of the basis plus 50% of the property’s
appreciated value, or two times basis. The donee must be
a public school providing elementary or secondary education.
The donee must certify in writing both that the books are
be suitable for use in the donee’s educational program,
and that the donee will use them in its program. Such contributions
must have been made after August 28, 2005, and before January
401 allows for exclusions from income of certain cancellations
of indebtedness because of Hurricane Katrina. This exclusion
is for individuals whose main place of abode was in the
core disaster area or for individuals living in the Hurricane
Katrina disaster area who sustained an economic loss. The
exclusion does not apply to business debts or to the extent
that the debt is secured by real property outside the Hurricane
Katrina area. The exclusion applies to cancellations of
debts on or after August 25, 2005, and before January 1,
Section 402 suspends the $100 floor and 10%-of-AGI reductions
to personal casualty losses in the Hurricane Katrina area
on or after August 25, 2005, if such losses are attributable
to Hurricane Katrina. The reductions of casualty losses
from section 165(h)(2)(A) will continue to apply to non-Katrina
losses and without regard to Katrina losses.
403 granted the Treasury Secretary the power to suspend
the date of filing and payment of employment and excise
taxes. This expands the Secretary’s previous power
to suspend the due dates of income, estate, and gift taxes.
For application in respect to Hurricane Katrina, it postponed
such due dates until at least February 28, 2006. The suspension
refers to items that were not expired prior to August 25,
404 suspends certain requirements for home loans financed
by mortgage revenue bonds for residences in the Hurricane
Katrina disaster area that were determined to be uninhabitable.
The limit on such loans was increased to $150,000. This
section will not apply to any financing provided after December
405 extends the replacement period for nonrecognition of
gain under involuntary conversion for property located in
the Hurricane Katrina disaster area from two years to five
years. To qualify, the property must have been “compulsorily
or involuntarily” converted on or after August 25,
2005, by Hurricane Katrina, and substantially all of the
use of replacement property must be in that area.
406 allows Katrina disaster victims whose earned income
in 2005 is less than their earned income in 2004 the choice
of computing the earned income credit based on actual 2005
earned income or earned income from the preceding year.
For purposes of errors made in this determination of the
earned income credit, incorrect use on a return of earned
income will be treated as a mathematical error.
407 gives the Treasury Secretary or his delegates the authority
to make adjustments in the application of laws so that temporary
relocations caused by Hurricane Katrina do not cause taxpayers
to lose deductions or credits that they would have otherwise
been entitled to, and that such relocation does not cause
a change of filing status.
Carr, CPA, is an instructor, and Tina Quinn,
PhD, CPA, is chair, both in the department of accounting
and law at Arkansas State University, Jonesboro, Ark.