Katrina Emergency Tax Relief Act of 2005 Signed into Law
On September 23, 2005, President Bush signed into law the Katrina Emergency Tax Relief Act of 2005, which offers assistance to taxpayers affected by Hurricane Katrina, specifically including residents of and businesses located in Orleans, Jefferson, and St. Tammany Parishes. The tax relief in KETRA offered to the victims of Hurricane Katrina includes:
- Waiver of Penalties for Withdrawals from Retirement Plans
Taxpayers whose principal residence was located in the Hurricane Katrina disaster area and who sustained an economic loss due to Hurricane Katrina may withdraw up to $100,000 from an eligible retirement plan, such as an IRA or a 401K, without incurring the normal 10% penalty for early withdrawals. If the taxpayer recontributes the distribution to the retirement plan within three years, the withdrawn amount will not be included in the taxpayerâ€™s ordinary income.
- Work Opportunity and Employee Retention Tax Credit
Any business hiring new employees who were residents of the Hurricane Katrina core disaster area on August 28, 2005 (â€œDisaster Area Employeesâ€) and businesses with fewer than 200 employees retaining Disaster Area Employees, are eligible for a 40% credit on the first $6,000 of wages paid to Disaster Area Employees.
- Exemption for Housing Katrina Victims
Individuals providing rent-free housing to persons displaced from their residence by Hurricane Katrina are entitled to receive an exemption of $500 in 2005 and 2006 for each displaced person housed for a period of 60 consecutive days during the tax year.
- Deduction of Casualty Losses
Individuals suffering a casualty loss attributable to Hurricane Katrina may deduct the entire loss without regard to the usual requirement that only those losses exceeding 10% of the individualâ€™s adjusted gross income may be deducted. A casualty loss caused by Hurricane Katrina can either be claimed in 2005 or by filing an amended return for 2004.
- Exclusion of Discharge of Indebtedness Income
Individuals may exclude from income the discharge of any non-business debt owed to an applicable entity, such as a bank, and discharged between August 24, 2005, and January 1, 2007.
- Replacement of Involuntarily Converted Property
Rather than the usual two year period to replace property destroyed, stolen, or condemned (an â€œinvoluntary conversionâ€), taxpayers whose property was involuntarily converted in the Hurricane Katrina disaster area have up to five years to replace the property without recognizing the gain on the loss of the property, if any.
- Extension of Time Period for Filing and Paying Taxes
Taxpayers affected by Hurricane Katrina may defer filing and paying federal income, employment, and excise taxes, including the payment of quarterly estimated taxes and federal tax deposits, until February 28, 2006.
In addition to the above-listed relief, we anticipate Congress will pass further legislation offering tax relief to those affected by Hurricane Katrina in the coming weeks. This legislation will likely include additional tax credits for those displaced by Hurricane Katrina, as well as accelerated depreciation and enhanced business expense deductions to promote investment in the affected areas. If you have any questions about the Katrina Emergency Tax Relief Act of 2005, the anticipated legislation, or any other tax matter, please do not hesitate to call the Tax Group at (225) 490-8900.