Hurricane Katrina Tax Relief Act

Hurricane Katrina Emergency Tax Relief Act

Explanation of Provisions

1. If you were affected by Hurricane Katrina, you may have more time to pay your estimated taxes and to file your tax return. The new deadline is February 28, 2006. But, if you lived in the following parishes or counties, you may have an automatic extension until August 28, 2006:

Louisiana: Cameron, Jefferson, Orleans, Plaquemines, St. Bernard, St. Charles, St. Tammany

Mississippi: Hancock, Harrison, Jackson

Persons severely impacted by Hurricane Katrina in certain other counties in Louisiana, Mississippi and Alabama may also be eligible for an extension to August 28, 2006.

Write “Hurricane Katrina” in red ink at the top of everything you send to the IRS.

To qualify for the extended deadline of February 28, 2006:

You must have been affected by Hurricane Katrina AND

You must live in the “disaster area.” The disaster area is:

Louisiana: Anywhere.

Mississippi: Anywhere.

Alabama: Baldwin, Bibb, Choctaw, Clarke, Colbert, Cullman, Greene, Hale, Jefferson, Lamar, Lauderdale, Marengo, Marion, Mobile, Monroe, Perry, Pickens, Sumter, Tuscaloosa, Washington, Wilcox or Winston counties.

Florida: Monroe, Broward, Miami-Dade, Bay, Collier, Escambia, Franklin, Gulf, Okaloosa, Santa Rosa or Walton counties.

You were “affected” by Hurricane Katrina if:

Your home or business was in the disaster area.

Your books or records were in the disaster area.

Your tax return preparer was located in the disaster area.

You are a relief worker helping in the disaster area.

Your trust or estate has tax records in the disaster area.

You file a joint federal income tax return with your spouse, and a, b, c, d, or e on this list is true about your spouse.

You were injured by Hurricane Katrina or while visiting the disaster area after the hurricane.

There are tax issues with the estate of someone killed while visiting the disaster area during Hurricane Katrina or afterwards.

If the IRS has sent you a penalty notice, you should call the phone number listed on the notice and explain that you were affected by Hurricane Katrina.

Ask the IRS to forgive interest and penalties for the length of any extension.

Are other tax deadlines extended because of Katrina?

The time periods for filing Tax Court petitions and seeking tax refunds may also be extended by the IRS. Check with your tax advisor.

If you or your business was affected by Hurricane Katrina, you are entitled to obtain tax transcripts, copies of past tax returns, and faster service at no cost to you.

Why would I want this?

Copies or transcripts of your tax returns can help you put together tax records lost in Hurricane Katrina. You might need these for loan applications, for example.

What do I get?

If you ask for a copy of a tax return you will get a full copy of that tax return.

If you ask for a transcript of a tax return, you must choose what kind of transcript. See Form 4506-T for the choices (http://www.irs.gov/pub/irs-pdf/f4506t.pdf).

How to request copies or transcripts:

To request a copy: Send Form 4506 to the IRS.
To request a transcript: Send Form 4506-T to the IRS.

Be sure to write “HURRICANE KATRINA” in red ink at the top of these forms.

You may not have to pay taxes on money you received as help after Hurricane Katrina. These are called disaster relief payments.

If your employer gives you money to pay for your family and living expenses, or to fix up your home, you don’t have to pay federal income taxes or employment taxes on that money.

But, you do have to pay taxes on the money if some other person or group (like FEMA or your insurance company) also pays you for the same thing.

You may not have to pay taxes on other relief payments.

Hurricane relief payments by FEMA and governments are not taxable unless insurance paid you for the same expenses.

b. But, you must pay taxes on unemployment compensation and business income replacement payments under insurance policies.

Earned Income Credit or Earned Income Tax Credit (EIC) – You may be able to get extra money from the government this year.

EIC is the Earned Income Credit (also called the Earned Income Tax Credit). It is a way to get money back from the government if you work but don’t earn a lot.

If you qualify for EIC, you may be able to use your 2004 income to figure out your 2005 EIC. Talk to a tax return preparer.

c. To determine if you are the “head of household”, you can exclude any payments received from the government or charities if you temporarily relocated because of Katrina.

If someone you know has died, you may be able to get EIC for that person on their final tax return.

There are many requirements for EIC and it is difficult to calculate. You should talk to a tax return preparer, especially if this is the first year you will apply for EIC.

Capital gains taxes – If your home or property was destroyed, you may not owe taxes on the money you received from insurance.

If your home or property was destroyed and the insurance company paid you, you may have a gain. However, you may not have to pay taxes on that gain.

To qualify:

You must have owned your house or property for 5 years before the insurance company paid you.

You must have used your house or property for at least 730 days (2 years worth of time) during those 5 years. The 2 years do not have to be continuous.

If you meet these two criteria, you do not have to pay taxes on gains up to $250,000.

You do not qualify for this if you previously used this rule within the last two years.

If you are married and file a joint tax return, you may not have to pay taxes on up to $500,000 of the gain you made from insurance.

To qualify:

EITHER you or your spouse must meet the 5 year ownership test.

BOTH you and your spouse must have used the property for 730 days during the 5 years.

NEITHER of you may have used this rule within the last 2 years.

If your spouse died before you got paid by the insurance company and you were not remarried at the time of the payment, you still may be eligible for the $500,000 deduction. Talk to a tax return preparer.

Casualty Losses – You may be able to take a tax deduction for your personal property that was damaged or destroyed by Hurricane Katrina. These are called casualty losses.

To qualify:

Your losses must have been in the disaster area.

Your losses must have been because of Hurricane Katrina.

Your losses must have happened after August 24, 2005.

You must itemize your deductions on your federal income tax return.

For all other losses, there are other rules.

Taking casualty losses is difficult, and you may want to discuss this with a tax return preparer.

You can take the tax deduction for Hurricane Katrina casualty losses on either your 2004 or 2005 tax return.

Should you put the deductions on your 2004 return or wait until 2005?

If you claim for the losses on your 2004 return, you will get your refund faster and may also save more in taxes.

But, you may save more in taxes by putting these losses on your 2005 return.

iii. Decide whether your claim for losses helps you more on your 2004 or 2005 tax return.

Talk to a tax return preparer to decide this.

How to take deductions on your 2004 return:

If you have not filed your 2004 tax return, just put these deductions on your 2004 return when you file it. Plus, you may have until February 28, 2006 to file your 2004 tax return (see question 1, above).

If you have already filed your 2004 tax return, you can change that tax return and get a faster tax refund. This is called amending your return.

iii. Warning: to claim Hurricane Katrina casualty losses on your 2004 tax return, you must file an amended 2004 tax return by October 16, 2006.

Whether you deduct from your 2004 or 2005 tax return:

If the only casualty losses you are claiming are from the Hurricane, write “Hurricane Katrina” in red ink on the top of your income tax return.

Attach Form 4684 (http://www.irs.gov/pub/irs-pdf/f4684.pdf) to your tax return and write “Hurricane Katrina” on the dotted line next to line 11. Write “0” on lines 11 and 17.

If you received insurance money because your property was damaged, you may not have to pay taxes on this money.

You must use the insurance money to replace your property within five years if you want to avoid paying taxes on the money. After five years, you may have to pay taxes on the insurance money.

To qualify:

Your property was destroyed after August 24, 2005.

Your property was destroyed because of Hurricane Katrina.

Your destroyed property was in the disaster area.

You replaced the destroyed property with something that you will use mostly in the disaster area.

There are different rules if you use the new property outside the disaster area.

Cancelled home purchases – If you took money out of your retirement plan before Hurricane Katrina to build or buy a permanent home, you may be able to put the money back without paying taxes.

To qualify:

You took the money out of your retirement plan to build or to buy a permanent house in the disaster area.

You took the money out of your retirement account after February 28, 2005 and before August 29, 2005.

You cannot build or buy the house because of Hurricane Katrina.

If you decide to keep the money you borrowed instead of putting it back into your retirement account, you will have to pay federal income tax. You may also have to pay a 10% penalty when you file your 2005 tax return.

Discharge of indebtedness – If you owed money and the party you owed it to says you do not have to pay it back, you may not have to pay taxes on that amount.

To qualify:

The debt is personal debt, like a credit card or mortgage. It is not debt from your trade or business.

The debt was forgiven after August 24, 2005 and before January 1, 2007.

The party forgiving the debt is a government agency or a financial institution (like a bank or credit card company).

You were living in one of these counties or parishes on August 25, 2005. These are called FEMA-designated individual assistance areas:

Louisiana: Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Pointe Coupee, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John, St. Mary, St. Martin, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge, or West Feliciana.

Mississippi: Adams, Amite, Attala, Claiborne, Choctow, Clarke, Copiah, Covington, Franklin, Forrest, George, Greene, Hancock, Harrison, Hinds, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston, or Yazoo.

Alabama: Baldwin, Choctaw, Clarke, Greene, Hale, Mobile, Pickens, Sumter, Tuscaloosa, and Washington.

If you were living in one of these counties or parishes on August 25, 2005, you must also show that Hurricane Katrina caused an economic loss if you want to avoid the taxes. These are called FEMA-designated public assistance areas:

Louisiana: Allen, Avoyelles, Beauregard, Bienville, Bossier, Caddo, Caldwell, Catahoula, Claiborne, Concordia, Desoto, East Carroll, Evangeline, Franklin, Grant, Jackson, LaSalle, Lincoln, Madison, Morehouse, Natchitoches, Ouachita, Rapides, Red River, Richland, Sabine, St. Landry, Tensas, Union, Vernon, Webster, West Carroll, and Winn.

Mississippi: Alcorn, Benton, Bolivar, Calhoun, Carroll, Chickasaw, Clay, Coahoma, DeSoto, Grenada, Holmes, Humphreys, Issaquena, Itawamba, Lafayette, Leflore, Lee, Marshall, Monroe, Montgomery, Panola, Pontotoc, Prentiss, Quitman, Sharkey, Sunflower, Tallahatchie, Tate, Tippah, Tishomingo, Tunica, Union, Washington, Webster, and Yalobusha.

Alabama: Bibb, Colbert, Cullman, Jefferson, Lamar, Lauderdale, Marengo, Marion, Monroe, Perry, Wilcox and Winston.

Florida: Monroe, Broward, Miami-Dade, Bay, Collier, Escambia, Franklin, Gulf, Okaloosa, Santa Rosa and Walton.

Note: You still have to pay federal income tax on debt forgiven on property outside the disaster area.

You can withdraw money from your retirement plan without paying the 10% early-withdrawal penalty.

You can take out up to $100,000, combined, from all of your retirement plans between August 25, 2005 and January 1, 2007.

You include one third of the withdrawal in your income over three years. For example, if you take out $60,000 in 2005, you would include $20,000 as income on your 2005, 2006 and 2007 tax returns instead of including the entire $60,000 in your 2005 tax return.

If you put all of the money back into your retirement plan before the end of three years, you do not have to pay tax on any of it. If you put part of the money back, you don’t have to pay tax on the repayment.

To qualify:

You lived in the disaster area on August 28, 2005.

You had an economic loss because of Hurricane Katrina.

Your retirement plan treats the payment to you as a “qualified Hurricane Katrina distribution.” Ask your employer about whether your retirement plan is qualified.

You may be able to borrow money from your retirement plan.

You can borrow money from your retirement plan and take a withdrawal (described above). Check with your human resources department to see if your retirement plan allows loans.

To qualify:

You lived in the disaster area on August 28, 2005.

You had an economic loss because of Hurricane Katrina.

You must borrow the money after September 23, 2005 and before January 1, 2007.

There are complicated rules about how much of the loan you can leave out of your income tax return. You should talk to a tax return preparer.

Note: If you already had a loan from your retirement plan on August 25, 2005, and the due date is between August 25, 2005 and December 31, 2006, you have an extra year to pay back the loan. You will also have to pay any interest on the loan, however.

Suspension of IRS collection activities – Prior to February 28, 2006, the IRS may not take any of the actions listed below if you or your business were affected by Hurricane Katrina. If the IRS contacts you about one of these before March 1, 2006, tell them you were affected by Hurricane Katrina.

Collect any taxes that became due after Hurricane Katrina.

Issue liens against your property to collect taxes you owed before Hurricane Katrina.

Take your wages to collect taxes you owed before Hurricane Katrina.

What if the IRS contacts me after February 28, 2006

You may be eligible for “Currently Not Collectible” status or other collection relief if collection would create economic hardship for you.

Talk to a Low Income Taxpayer Clinic or your tax advisor.

Where can I get help on tax disputes with the IRS if I can’t afford an attorney

Each state has 1 or more Low Income Taxpayer Clinics that provide free legal help to taxpayers whose household income is below 250% poverty.

You can find the Clinic closest to you in IRS Publication 4134. This can be found at www.irs.gov.

c. Your state’s IRS Taxpayer Advocate Service may also help.

You should keep the IRS up to date on your new address. There are special phone numbers to call the IRS on disaster issues and refund claims.

IRS Website: www.irs.gov (information on help for hurricane victims is on the front page).

Special hotline for Hurricane victims: 1-866-562-5227.

Corporations

If you were affected by Hurricane Katrina, you may have more time to file your business’s estimated taxes and tax return. To qualify:

You must have been affected by Hurricane Katrina (see above) AND

You must live in:

Louisiana: Anywhere.

Mississippi: Anywhere.

Florida: Monroe, Broward, Miami-Dade, Bay, Collier, Escambia, Franklin, Gulf, Okaloosa, Santa Rosa or Walton counties.

The new deadline is February 28, 2006 for these items:

Calendar-year corporate returns with automatic extensions, which were originally due on September 15, 2005.

Federal employment and excise tax returns, originally due on October 31, 2005 and January 31, 2006.

Employment and excise deposits originally due on or before February 28, 2006.

Estimated taxes originally due on September 15, 2005 or December 15, 2005.

Work Opportunity Credit – Employers can get a tax credit of up to $2,400 per employee for Hurricane Katrina employees.

A Hurricane Katrina employee is a person who:

Was living in a FEMA-designated individual assistance area on August 28, 2005;

Was hired between August 28, 2005 and August 27, 2007; and

Was hired to work in a FEMA-designated individual assistance area.

Was living in a FEMA-designated individual assistance area on August 28, 2005;

Was displaced from their home because of Katrina; and

Was hired between August 28, 2005 and December 31, 2005, whether or not the new place of work is in a FEMA-designated individual assistance area.

Employers can get a credit for up to $2,400 for each employee that worked at least 120 hours in their first year of work. Talk to your tax return preparer for how to calculate this.

The employee has to show the employer that he or she is a Hurricane Katrina employee.

This law also applies even if the employee worked for the employer before Hurricane Katrina. However, the employee cannot have worked for the employer on August 28, 2005.

Employee Retention Credit

Employers can take a tax credit for up to $2,400 per employee, on “qualified wages” (described below).

To qualify:

The employer must have been running an active business on August 28, 2005 in a FEMA-designated individual assistance area.

The employer has not been able to run the business since August 28, 2005 because of Hurricane Katrina.

The employer will not be able to run the business until January 1, 2006 at the earliest Hurricane Katrina.

The employer usually has fewer than 200 employees.

What are “qualified wages”?

Wages that were paid or incurred by the employer after August 28, 2005 and before January 1, 2006.

The period during which the qualified wages were paid or incurred begins on the date the business could not be run at the main place of business where the employee worked right before Hurricane Katrina and ends on the date the business restarted significant operations at that location.

Qualified wages include wages paid whether or not the employee performed any services, performed services at a different place of employment than the main place of employment, or performed services at the main place of employment before significant operations resumed.

There are other limitations on this rule, so you should discuss it with a tax professional.