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Congress Paints Additional Katrina Tax Relief with Broad Brush, CCH Says
(RIVERWOODS, ILL., September 23, 2005) – Additional tax relief to help victims of Hurricane Katrina is now in place after President Bush today signed the bill passed by Congress. CCH, a leading provider of tax law information, software and services, has issued a special Tax Briefing on the new law, click here.
“There’s something for just about everyone in this package, from low-income workers to large corporations donating cash or schoolbooks,” said Mark Luscombe, JD, principal federal tax analyst for CCH.
Help with Losses, Jobs
The new law allows individuals whose home or other property was damaged by Katrina to fully deduct their losses, waiving the disallowance of the first $100 and first 10 percent of adjusted gross income that otherwise apply. People whose debts, such as a mortgage, are cancelled due to the disaster will not have to count the “discharge of indebtedness” as income.
People who tap their IRAs and pensions to cope with hurricane expenses won’t have to pay the usual early-withdrawal penalties. What’s more, if they repay the distribution within three years, they can avoid regular income tax on it. If their distribution does count as taxable income they can, if they wish, spread that income and pay the tax over three years. Loan limits for victims in qualified plans such as 401(k)s are raised from $50,000 to $100,000 until January 1, 2007.
“These are cases where it otherwise might look like the tax laws were rubbing things in for the victims, instead of helping them out,” Luscombe observed.
The law also has several provisions to encourage businesses to hire people affected by Katrina or keep them on their payrolls. Employers located in the affected area can claim the Work Opportunity Tax Credit for Hurricane Katrina employees hired over the next two years, while employers located outside the area can claim the credit for Hurricane Katrina employees hired through the end of this calendar year.
Small employers – those with an average of 200 or fewer employees – whose businesses are inoperable as a result of Hurricane Katrina damage, can claim a tax credit through the end of the 2005 calendar year if they keep an eligible employee on their payroll. The tax credit equals 40 percent of the first $6,000 of wages paid to the employee between August 28, 2005 and January 1, 2006. They can claim the credit even if the employee reports to work at another location while the business is inoperable.
Preserving Credits, Filing Status
Lower-income people affected by Katrina face the possibility that they will lose all or part of their earned income credit and the child credit because of lower earnings or because they are temporarily separated from their children. Separation from children or boarding with relatives may also lead to a loss of the favorable “head of household” filing status for single parents.
The new law addresses these problems by giving people displaced from their principal residence by Hurricane Katrina the option of using their 2004 income to calculate the child credit and the earned income credit on their 2005 tax returns. The proposal also grants the U.S. Treasury Department the authority to ensure that taxpayers do not lose tax benefits or experience a change in filing status in 2005 and 2006 due to temporary relocations.
“These provisions may actually affect the greatest number of people,” Luscombe observed. “To take advantage of other tax-related assistance, people either have to itemize or have retirement savings they can draw on. Lower-income people affected, however, probably take the standard deduction and may have little or no savings.”
Encouraging Good Samaritans
The law also contains a number of measures aimed at encouraging individuals and companies to help out in a variety of ways. For example, it creates a special tax deduction for people who provide rent-free housing in their own homes to dislocated persons for at least 60 days. The deduction is $500 for each displaced person, up to a maximum of $2,000. The deduction can be claimed in either 2005 or 2006, but cannot be claimed in both years for the same dislocated person.
In other provisions, the new law:
- Encourages cash donations by individuals by waiving limits on itemized deductions for donations made before January 2006.
- Encourages cash donations by corporations by waiving a 10-percent income limitation for cash donations related to Hurricane Katrina if the donations are made before January 2006.
- Allows a more favorable tax treatment when using a personal vehicle for charitable work by increasing the charitable mileage reimbursement rate from 14 cents per mile to 70 percent of the business-use rate, which currently stands at 48.5 cents per mile. A volunteer who is reimbursed for the use of a personal vehicle does not have to pay income tax on the reimbursement. Both provisions are effective through December 31, 2006.
- Encourages charitable donations of food inventory by making S-Corporations, partnerships and sole proprietors eligible to deduct the cost of food inventory donations through the end of 2005. The deduction is currently limited to C-Corporations. The value of the deduction is equal to the lesser of two times the basis or basis plus one-half of the added value.
- Encourages companies to donate educational books to public schools by allowing a charitable deduction through the end of the 2005 calendar year. The deduction is equal to two times the firm’s basis or its basis plus one-half of the added value, whichever is less.
“In some cases, such as expanding the kinds of businesses eligible to deduct food they contribute, it’s difficult to see why the provisions shouldn’t be a permanent part of the tax code,” Luscombe observed.
About CCH Tax and Accounting
CCH Tax and Accounting (tax.cchgroup.com), based in Riverwoods, Ill., is the nation's premier provider of tax and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market leading products are The ProSystem fx(r) Office, CCH(r) Tax Research NetWork(tm), Accounting Research Manager(tm) and the U.S. Master Tax Guide(r). CCH Tax and Accounting is a Wolters Kluwer company.
Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of EUR3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.
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