Individual tax relief

Individual tax relief is not only being provided to victims of Katrina, but also to individuals and businesses helping in the recovery.

Katrina has displaced thousands who are now without jobs or homes. Since both relocation and joblessness can affect a person’s tax status, KETRA gives Katrina evacuees the option of using 2004 income to calculate the child tax credit and earned income credit on their 2005 tax returns. To be eligible for this particular tax benefit, taxpayers must have lived in the Hurricane Katrina disaster area as of August 25, 2005; must have been displaced from their homes; and must have less earned income in 2005 than in 2004.

Further, the IRS is authorized to make adjustments in the application of tax laws so that taxpayers do not lose any tax benefits or experience a change in filing status in 2005 and 2006 due to temporary relocations caused by Katrina.

One of the changes provided by KETRA that will offer the greatest benefit to most taxpayers is the change in reporting casualty losses. Uninsured casualty losses are generally deductible only to the extent that they exceed 10 percent of a taxpayer’s adjusted gross income plus $100. However, KETRA eliminates these limits, meaning the full amount of any uninsured casualty losses that occurred on or after August 25, 2005 that are attributable to Katrina may be deducted in full.

This new law does not change the fact that a taxpayer must itemize in order to deduct casualty losses. Taxpayers who do not itemize have the option of deducting a casualty loss in either 2005 on their 2004 returns; a larger refund for Katrina may be possible for those who elect to amend their 2004 return.

Tax relief for businesses

Certain provisions of KETRA are designed to help businesses and their employees in the Katrina disaster area recover.

The Work Opportunity Tax Credit is designed to encourage employers to hire certain target groups who are considered to face barriers of employment. The credit generally equals 40 percent of the first $6,000 of wages paid to the employee in the first year ($2,400 maximum credit).

KETRA creates a new WOTC target group: Hurricane Katrina employees—those individuals whose principal place of residence was in the core disaster area on August 28, 2005. Companies can claim the WOTC for Hurricane Katrina employees hired after August 27, 2005. Employers inside the core disaster area can claim the credit for Hurricane Katrina employees hired by August 27, 2007. For employers outside the core disaster area, the credit is available for Hurricane Katrina employees hired by December 31, 2005.

Small employers (a business that employs an average of 200 or fewer employees during the tax year) in the core disaster area who continue to pay employees while business operations are suspended may claim a tax credit equal to 40 percent of the first $6,000 paid to each eligible employee while the business is in operation from August 28, 2005 through December 31, 2005.

Claims process

The process of claiming tax relief is as follows:

• Relief is automatic in the hardest-hit areas, designated as individual assistance areas by FEMA. Taxpayers need not take any action to obtain the extensions and tax relief provided by KETRA.
• In areas designated by FEMA as public assistance areas, taxpayers must identify themselves as Hurricane Katrina victims.
• Taxpayers outside of the disaster area who qualify for extensions or other KETRA relief must also identify themselves as victims of Hurricane Katrina.

It has been strongly recommended by the IRS that all Katrina victims write the words HURRICANE KATRINA in red ink across the top of their tax returns.

Other benefits

The items listed above are only a few of the benefits that KETRA offers. Many more benefits are included, including information relative to retirement plan and IRA distributions, mortgage revenue bonds, charitable tax provisions, sheltering evacuees, charitable contribution limits, mileage reimbursement, etc. Taxpayers should consult their accountant to obtain more information about the benefits that will specifically apply to their personal tax situation.

Many other government benefits are being proposed to assist the taxpayers who have been affected by this disaster. Therefore, the information noted above is subject to change.

Patrick Gros, CPA, APAC can be reached at his Covington office, 898-3512.