Congress has passed a $6.1 billion law providing temporary tax relief to affected individuals and businesses, incentives for rebuilding storm-damaged areas, and expanded tax breaks for charitable donations. Signed into law by President Bush on Sept. 23, the Katrina Emergency Tax Relief Act of 2005 is the first of what is expected to be a series of tax measures aiding hurricane victims in rebuilding their lives.
Sen. Max Baucus (D-MT), ranking member of the Senate Finance Committee, said Congress acted quickly to deliver urgently needed assistance, but added that Congress would likely develop additional legislation after holding fact-finding hearings on the effectiveness of previous tax laws designed to help disaster victims.
"Passing this tax package and getting it to the president is the first step in tackling the devastating circumstances Katrina has left behind," Baucus said after the bill won unanimous approval in the Senate. "We are also working to provide long-term tax help, but today's package will give urgent relief so victims can start picking up the pieces and putting their lives back together."
The tax benefits contained in the new legislation include:
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All restrictions on casualty loss deductions associated with Hurricane Katrina are suspended. Under normal circumstances, unreimbursed casualty losses may be deducted only if they exceed 10% of the taxpayer's adjusted gross income, and the first $100 per occurrence is not deductible.
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Deadlines for filing or paying taxes falling in the months after the hurricane hit are extended to February 28, 2006 for victims.
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Gulf Coast evacuees displaced from their principal residence will be permitted to use their 2004 income to calculate the child and earned income tax credits on their 2005 tax returns.
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Katrina victims will not be taxed on personal debts, including mortgages, discharged between August 25, 2005 and December 31, 2006.
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Individual hurricane victims receiving insurance payouts for damaged property will not owe taxes on the proceeds provided they purchase replacement property within five years, up from the previous limit of four years. The time frame for reinvestment of insurance proceeds by affected businesses is extended from two years to five years. Businesses and individuals must buy replacement property in the disaster area to qualify for the extended deadlines.
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The law waives for hurricane victims the 10% penalty for premature distributions from 401(k)s and IRAs, raises the limit on loans from qualified retirement plans from $50,000 to $100,000, and allows retirement plan participants to pay income tax on Katrina-related hardship distributions over three years.
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The Work Opportunity Tax Credit (WOTC) is extended for two years to Gulf Coast employers hiring workers who lived in the disaster area before the hurricane and became unemployed as a result of damage or destruction to their previous places of employment.
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Small employers whose businesses were damaged in Hurricane Katrina may claim a tax credit equal to 40% of the first $6,000 on wages paid to employees through the end of the year.
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For individuals, the level of tax-deductible cash contributions made to any qualified charity has been increased from 50% to 100% of income for the period between August 28, 2005 and January 1,2006. Corporations are permitted to deduct up to 100% of taxable income for contributions made to hurricane relief charities over the period, up from 10%.
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Taxpayers who provide rent-free housing for Katrina victims in their principal residences for at least 60 days may claim a special exemption of $500 for each evacuee, up to $2,000 per household.
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Volunteers driving their personal vehicles on Katrina-related charity business may deduct to 34 cents a mile for miles driven in the last four months of 2005, up from the 14 cents per mile.
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C corporations may claim enhanced deductions for certain types of food and book donations.
In addition to these tax breaks, the IRS has granted in Notice 2005-68 special tax relief for leave-based charitable donation programs aiding survivors of Hurricane Katrina. Under the new rules, employees who forgo vacation time or other forms of paid leave in exchange for employer cash payments to hurricane relief organizations do not have to include the donated leave in their income. Employers making cash payments to these charities on behalf of employees before January 1, 2008 are permitted to deduct these payments as an ordinary and necessary business expense, rather than as a charitable contribution.
