President Bush signed legislation that provides $6.1 billion tax relief for people and businesses reeling from Hurricane Katrina. While most of the tax-law changes apply to those in the hard-hit Gulf region, some breaks extend to charity-minded taxpayers throughout the country.
First, let's look at tax breaks available to those not directly affected by the disaster:
Charity donation caps lifted. Typically, your charitable-donation deductions are limited to 50 percent of your adjusted gross income (AGI). The new law eliminates that cap, as well as the charity-deduction limit for donations made by high-income taxpayers. These tax breaks apply to cash or check donations made to public charities after
Aug. 27 and before Jan. 1, 2006.
Advice: Pile on charitable donations before year-end. These provisions aren't restricted to donations for Katrina relief; they apply to all cash or check donations to IRS-approved public charities after Aug. 27 and before Jan. 1.
Bigger corporate donations. Corporations can usually deduct charitable donations up to 10 percent of their taxable income for the year. The new law waives the 10 percent cap for corporate cash or check donations to public charities made before year end. Unlike the new rule for individuals, corporate cash donations must be used for Katrina-related efforts, and the company must obtain proof of that donation. The same Aug. 27–to–Jan. 1 window applies to this rule for corporate cash donations.
Advice: Establish a program that matches employee cash contributions for hurricane relief without fear you'll exceed the annual 10 percent limit.
Also, previous law allowed C corporations to claim enhanced deductions for qualified donations of inventory, including food. The new law extends that tax break to S corporations, partnerships and sole proprietors for food inventory donations made before 2006.
A true tax "shelter." If you've taken hurricane evacuees into your home free of charge for at least 60 days, you can claim a $500 deduction per evacuee. The total deduction is capped at $2,000.
Better break for charity-related travel. The new law increases the normal IRS deductible rate of 14 cents per mile for charitable driving to 34 cents per mile for charity driving related to Hurricane Katrina. The new rate applies to miles driven from Sept. 1 to Dec. 31, 2005. You can also include tolls and parking fees. (The Katrina-related rate is 29 cents per mile for travel occurring between Aug. 25 and Aug. 31.)
Tax credit for hiring displaced employees. Previous law allowed you to claim the Work Opportunity Tax Credit (WOTC) for hiring certain "disadvantaged" employees. The new law adds a new group (Hurricane Katrina employees) to that list. The tax credit generally applies for qualified employees hired before 2006.
Plus, the law created a new tax credit for small employers (fewer than 200 employees) in the core disaster area that keep employees on the payroll. That employee-retention credit is equal to 40 percent of the first $6,000 of wages paid to eligible employees between Aug. 28, 2005, and Dec. 31, 2005.
Tax breaks for hurricane victims
Higher casualty loss write-offs. Typically, you can start deducting personal casualty losses only after they exceed
10 percent of your AGI (after subtracting $100 per casualty). The new law removes these limits for nonbusiness casualty losses related to Hurricane Katrina.
That provision also allows you to amend your 2004 tax return to obtain faster tax relief for those casualty losses.
Penalty-free retirement-plan withdrawals. If you withdraw funds from an IRA or qualified retirement plan prior to age 591/2, you typically must pay a 10 percent penalty on top of regular income tax, unless a special exception applies. The law lets Katrina victims withdraw up to $100,000 penalty-free before Jan. 1, 2007.
Bigger retirement-plan loans. The new law allows Katrina victims to take loans of up to $100,000 from their retirement plans. The usual limit is $50,000. That provision affects loans made between Sept. 22, 2005, and Jan. 1, 2007. Other new provisions separately ease the rules for certain retirement-plan loan payment dates and retirement-plan withdrawals that were intended to be used to buy or build a home.
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