Are you affected by Hurricane
Katrina?
See which KETRA provisions for
individual taxpayers apply to you.
Discharge of indebtedness related to Katrina. If your principle residence was located in Katrina's core disaster area on Aug. 25, 2005, or if you were outside of the core disaster area and suffered an economic loss, you are not required to pay tax on benevolent cancellation of debts. This provision applies to such cancellations that occur after Aug. 25, 2005, and before Jan. 1, 2007. This tax law change also benefits individuals not in debt whose debt discharge would have otherwise been taxable.
Withdrawals from retirement plans. The 10 percent penalty tax for early distributions from IRAs and other qualified retirement plans (including defined benefit plans, 401(k) plans, and 403(b) plans) has been waived for individuals whose principle residence was in Katrina's core disaster area and those who sustained an economic loss due to the hurricane. However, the maximum withdrawal cannot exceed $100,000 and must be taken within one year of the disaster date. In addition, the income tax on the distribution can be paid proportionally over a three-year period.
Any withdrawals can be recontributed to a qualified retirement plan or IRA at any time over the three-year period following the distribution date and will receive rollover treatment. In order to qualify for recontribution, the distribution from the account must be made after Aug. 25, 2005, and before Jan. 1, 2007. Within the three years, if the amount of the qualified distribution is recontributed to an eligible retirement plan, you can file an amended return (or returns) to claim a refund for the tax connected to the amount of the distribution, previously included in income. Under KETRA, qualified Hurricane Katrina distributions are not subject to the mandatory 20 percent withholding.
If you withdrew funds from an IRA with intentions of purchasing or constructing a home located in Katrina's disaster area, those funds can be recontributed to the qualified retirement plan or IRA. Distributions that qualify for this relief must be received after Feb. 28, 2005, and before Aug. 29, 2005.
Loans from retirement plans. Before Katrina, loans from retirement plans were limited to the lesser of 50 percent of the balance or $50,000. Hurricane Katrina victims now qualify to receive increased distributions to the lesser of $100,000 or 100 percent of the account balance, but not less than $10,000. Additionally, if you took out a loan on or after Aug. 25, 2005, payments due after Aug. 25, 2005, and before Dec. 31, 2006, can be delayed for one year. The interest will accrue on the balance not paid.
Casualty losses. KETRA waives the $100 floor and 10 percent of AGI threshold for personal casualty losses incurred on or after Aug. 25, 2005, in the disaster area, including those claimed on amended returns. Like all casualty and theft losses, Hurricane Katrina losses must be claimed as an itemized deduction. If you take a standard deduction, you can't claim them. Also, you cannot claim a deduction for any part of the loss for which you received or expect to receive insurance or other reimbursement.
Deferral of gain on property lost in the hurricane. KETRA provides a five-year replacement period for individuals and businesses that wish to defer gain for personal and business property damaged or destroyed by the hurricane. Keep in mind that all use of the replacement property must be in the disaster area. This bill extends the original replacement periods of four years for individuals and two years for businesses.
Extension of time. Victims of Katrina now have until Feb. 28, 2006, to file returns, pay any taxes or make any deposits due. This extension applies to employment and excise taxes as well as income, state and gift taxes. Penalties and interest that would normally apply are waived.
Child Tax Credit and Earned Income Credit. Hurricane victims can now use their 2004 income to calculate their child tax credit and earned income credit for their 2005 tax returns. This election can only be made if 2005 earned income is less than 2004 earned income.
A qualified victim for this provision includes individuals whose principle residence was located in the core disaster area on Aug. 25, 2005. If you were outside the core area, you must have been displaced by the hurricane to qualify. Also, for joint returns, only one taxpayer has to qualify as a hurricane victim. But, the earned income is the sum of the earned income of both spouses. Please note that 2005 gross income is used regardless of the election made.
Taxpayer and dependency status. KETRA ensures that hurricane victims do not experience a change in filing status or lose any dependency exemptions or credits for 2005 due to relocation.
Mortgage revenue bonds. By removing the first-time homeowner requirement and relaxing the purchase price and income limitations for homes in the disaster area that were determined uninhabitable for three years, KETRA has allowed greater access to mortgage revenue bond proceeds for Katrina victims. It also raises the limit for qualified home-improvement loans to $150,000. The change applies to financing provided before Jan. 1, 2008.