Katrina Emergency Tax Relief Act

The Katrina Emergency Tax Relief Act of 2005 signed into law by President Bush on September 23, 2005, also helps those who have volunteered or donated to the hurricane relief effort. These provisions include new tax breaks for charitable contributions as follows:

• Temporary suspension on income limits for new charitable donations for 2005. This increases the cash contribution level for individuals from fifty to one hundred percent for cash donations made between August 29, 2005 to December 31, 2005. Overall limitation on itemized deductions waived. Importantly, the enhanced charitable deductions for individual cash donations applies to all charities, not just charities engaged in work related to Hurricane Katrina. It is important to note that this temporary suspension of the limitations will not apply to gifts made to donor advised funds at a community foundation or other entity, to supporting organizations, and to private family foundations. However, donations to unrestricted and field-of-interest funds at community foundations and to private operating foundations will qualify for the enhanced incentive. For example, a donation to a Hurricane Katrina relief fund at a community foundation in the Gulf Coast.
• Temporary suspension of the income limits on new corporate cash charitable donations for Katrina relief in 2005 described in Code Sec. 170 (b)(1)(A) (other than supporting organizations described in Code Sec. 509(a)(3)). This increases the percentage limitation to one hundred percent of the corporation's taxable income for new contributions of cash to the Katrina relief effort for one taxable year ending on or before December 31, 2005. The corporation's qualified contributions must be for relief efforts related to Hurricane Katrina and the corporation must substantiate that the contribution is made for Hurricane Katrina relief efforts.
• C corporations, S corps, partnerships and sole proprietorships engaged in a trade or business may claim an enhanced deduction for food contributions (food that is intended for human consumption and meets all quality and labeling standards) of inventory to 501(c)(3)organizations (except private nonoperating foundations). This applies to contributions made from August 28, 2005, in tax years ending after such date and will not apply to contributions made after December 31, 2005.
• The mileage rate for deductions claimed by individuals for use of vehicles for charitable purposes is raised from the current 14 cents/mile to 70 percent of the business rate, if the vehicles were used to provide relief related to Hurricane Katrina. If the individual is a volunteer and is reimbursed for the use of the personal vehicle, the individual does not have to pay income tax on the reimbursement. Both provisions are effective through December 31, 2006 and the taxpayer must substantiate that expenses are incurred in providing relief related to Hurricane Katrina.
• Those providing rent-free housing to families displaced by Hurricane Katrina for two months or longer are eligible to claim a special exemption of $500 per individual, with a maximum deduction of $2,000 per household.
• Note that California does not conform to any of the provisions. It is possible, however, that the Legislature could retroactively conform when legislators reconvene in January 2006.

The bill also provides incentives for employers to hire Katrina victims or keep them on the payroll. The first extends the Worker Opportunity Tax Credit to employers who hire people who were living in the disaster area. The credit is worth up to $2,400 for a full-time worker. Employers in the disaster area can get the credit for qualified workers they hire this year or next. Employers outside the disaster area can get it only for workers they hire before the end of the year. Employers cannot claim it if they rehire workers on their payroll at the time of the hurricane.

If you are considering a large contribution please consult your tax advisor.