Senators seek federal tax relief for disaster victims in the Midwest
WASHINGTON --- A comprehensive plan to provide $3.96 billion in federal taxrelief to flood, tornado and severe storm victims in the Midwest was introduced today bySenators Chuck Grassley and Tom Harkin of Iowa, Kit Bond and Claire McCaskill ofMissouri, Norm Coleman and Amy Klobuchar of Minnesota, Dick Durbin and BarackObama of Illinois, Pat Roberts and Sam Brownback of Kansas, and Evan Bayh andRichard Lugar of Indiana.
The “Midwestern Disaster Tax Relief Act of 2008” is modeled after tax legislation that Congress passed to help victims of Hurricanes Katrina, Rita and Wilma in 2005 and the tornado in Kiowa County, Kansas in 2007. Sponsors of the new legislation-- S.3322 -- are urging Congress to act quickly. The same bill was introduced today inthe House of Representatives by Representatives Dave Loebsack, Tom Latham, BruceBraley, Steve King and Leonard Boswell of Iowa.
“Federal tax relief has proven to be very helpful to disaster recovery efforts inrecent years. This summer, devastating natural disasters hit Iowa and other parts of theMidwest, so now it’s time for Congress to pass tax relief legislation for the Midwest. Iwas Chairman of the Finance Committee after Hurricane Katrina. Lawmakers actedquickly for victims along the Gulf Coast. In 2005, a major individual tax relief packagewas signed by the President within three weeks of the Katrina disaster. A few weekslater, Congress followed up with an infrastructure and business tax relief package.Congress appropriated $60 billion in emergency funds within a week of the storm andmuch more followed. This year, we’re seeking the same consideration for Midwesterndisaster victims,” Grassley said. “After learning lessons from 9-11, Katrina and otherdisaster packages, we’ve tailored this year’s package to the needs of this major naturaldisaster.”
“Iowans are picking up the pieces after enduring one of the most brutal floods inour state’s history,” Harkin said. “After a disaster of this magnitude, Iowans deservestrong federal support. This tax relief will go a long way toward helping families,businesses and non-profits recover and rebuild after the disaster.”
“The recent floods, severe storms, and tornadoes have torn through the homes andlives of many Minnesotans and they need our help,” Coleman said. “This tax relieflegislation provides victims of the Midwestern disasters with the support needed torecover and rebuild their communities. The best time to deliver this relief was yesterday,but the second best time is now and I will stand with my colleagues to ensure it becomesa reality for those who are still recuperating from the disasters.”
“In Illinois, we still don’t know the full extent of our losses,” Durbin said. “Thedamage is bad, but it could have been a lot worse had it not been for the hard work anddetermination of everyone who helped us prepare for the floods. I will bring a similarresolve to Washington as we work on approval of a tax relief package that will helppeople and communities across the Midwest get back on their feet after this majordisaster.”
“Families and communities across Illinois and the Midwest have lost so much as aresult of this summer’s flooding, and we must do everything we can to help them recoverand rebuild as soon as possible,” Obama said. “I am proud to support this bill to offer taxrelief and assistance to the victims of this disaster. I will continue to work with mycolleagues to help rebuild the Midwest in the days and weeks ahead.”
“From tornados this spring to the recent flooding on the Mississippi and MissouriRivers, Missourians have been hard-hit by Mother Nature. The provisions in this bill willhelp disaster victims in my home state and across the Midwest rebuild. It is criticalCongress acts now to provide the relief our families, businesses and communities need,”Bond said.
“Throughout this epic event Missourians were able to come together and do whatwas necessary to prevent a tremendous amount of damage. And yet, the devastation isstill overwhelming. Missourians will need all help from all possible angles to make surewe can rebuild America’s heartland,” McCaskill said.
“Our local communities in Minnesota showed incredible courage and resilience inrebuilding from this year’s floods and storms,’’ Klobuchar said. “But at a time like this,local communities should not be expected to fend for themselves. The federalgovernment has an essential role to support communities as they recover and rebuild.”
“Disaster Tax Relief is a critical element of recovery as many Indianacommunities embark on efforts to rebuild their homes and businesses,” Lugar said.“Thousands of residents in Indiana and across the Midwest have had their liveschaotically disrupted by storms, tornadoes and floods. We can and must do more todeliver critical aid to storm victims so they can rebuild their homes, their businesses andtheir lives,” Bayh said.
Individuals and businesses located in presidentially declared disaster areas due tofloods, tornados and severe storms in Iowa, Arkansas, Illinois, Indiana, Kansas,Michigan, Minnesota, Missouri, Nebraska and Wisconsin would be eligible for theMidwestern Disaster Tax Relief Act of 2008.
Among other provisions, the legislation would let disaster victims with damage totheir primary residence tap their assets and access cash by withdrawing money fromretirement plans without tax penalties; suspend limits on tax incentives for charitablecontributions, strengthening local and other fundraising drives collecting money to helpsmall businesses and families recover; create tax-credit bond authority to help localgovernments rebuild infrastructure; increase the amount of tax-exempt bond authority tohelp businesses receive below-market interest rate financing; remove limitations ondeducting casualty losses due to natural disaster; and reduce the 2008 tax burden forsmall and mid-d businesses by substantially increasing the 2008 deductions for thedepreciation and expensing of business property.
Here’s a summary of what’s in the bill.
RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR ASSISTANCE
The proposals immediately below benefit taxpayers located in all counties in the tenstates mentioned above that are presidentially-declared (FEMA) major disaster areasdetermined to warrant individual assistance, individual and public assistance, or publiconly assistance due to flooding, tornadoes, or severe storms.
Qualified Disaster Recovery Assistance Distributions. The proposal waives the 10percent penalty tax if a distribution from an individual retirement account (“IRA”) or taxfavoredretirement plan (e.g., Code sections 401(k), 403(b), or 457(b) plans) isconsidered a qualified Disaster Recovery Assistance distribution (“qualifieddistribution”). A distribution is considered a qualified distribution if it is made on or afterthe presidentially-declared disaster date (“applicable declaration date”) and beforeJanuary 1, 2010 and is made to an individual whose principal residence on the applicabledeclaration date is located in a Midwestern disaster area and who sustained an economicloss by reason of the disaster. Other principal features include the following: (i) thewaiver is limited to amounts up to $100,000; (ii) the mandatory withholding rulesapplicable to eligible rollover distributions would not apply; (iii) participants receiving aqualified distribution would be permitted to spread the income tax resulting from receiptof the distribution ratably over three years; and (iv) amounts distributed may be recontributedto the plan over a three-year period following the distribution and such recontributedamounts would not be includible in income in the tax year in which thedistribution was made (e.g., if a participant received a qualified distribution in 2008 andsubsequently re-contributed the distribution amount in 2009, the participant may file anamended return requesting a refund for the amount taxable in 2008).
Recontribution of Withdrawals for Home Purchases. The proposal allowsdistributions for home purchases that were made from a Code section 401(k) or 403(b)plan or IRA after the date which is 6 months before the applicable declaration date andbefore the day after the applicable declaration date and that were not finalized because ofthe tornadoes and floods giving rise to the designation of the area as a disaster area to bere-contributed to the plan or IRA tax-free (i.e., the recontributions would be treated asrollovers). Amounts must be re-contributed within four months from the date ofenactment of the bill in order to receive favorable tax treatment.
Loans from Qualified Plans. The proposal effectively doubles the limitation on loansfrom a 401(k), 403(b), or a governmental 457(b) plan by allowing participants located ina Midwestern disaster area and who sustained economic loss by reason of the tornadoesand floods giving rise to the designation of the area as a disaster area to receive loans upto the lesser of $100,000, or 100 percent of the vested accrued benefit for loans madeafter the date of enactment and before January 1, 2010. In addition, outstanding loanpayments due on or after the applicable declaration date and before January 1, 2010 maybe deferred an additional 12 months, with appropriate adjustments for interest.Suspension of Casualty Loss Limitations. Under present law, non-business casualtylosses are deductible by taxpayers who itemize only to the extent they exceed ten percentof adjusted gross income and a one-hundred dollar floor. In some circumstances,taxpayers are permitted to include a current-year casualty loss on an amended prior yearreturn. The proposal eliminates the ten percent and one-hundred dollar floor for casualtylosses resulting from the Midwestern disaster and incurred in the disaster area, includingthose claimed on amended returns.
Special Look-Back Rule for EIC and Refundable Child Credit. To deal with thesituation where 2008 records are lost or destroyed in a disaster, this proposal allows lowincomeworking families an election to use their 2007 income amount for purposes ofdetermining their eligibility for the refundable earned income credit and the refundablechild tax credit.
Additional Personal Exemption for Housing Victims. Current law provides a personalexemption for taxpayers, their spouses, and dependents. The proposal allows taxpayerswho house up to four dislocated persons from the Midwestern disaster for a minimum ofsixty days in their principal residences an additional personal exemption of $500 perdislocated person (maximum additional personal exemption increase of $2,000). Familymembers (other than spouses and dependents) staying with the taxpayer may qualify, andthe housing must be provided rent-free. This proposal would not affect any deductions orexemptions for the dislocated person on the dislocated person’s tax return. The deductioncan be claimed in 2008 and 2009, but cannot be claimed in both years with respect to thesame person.
Exclusion for Certain Cancellations of Indebtedness. Under current law, grossincome generally includes any amount realized from the discharge of indebtedness. Theproposal ensures that individuals are not taxed on personal debt that is discharged inresponse to damage suffered from the Midwestern disaster. For example, if a house isdamaged or destroyed and the mortgage lender discharges all or part of this mortgagedebt, the amount discharged is not treated as income as a result of the proposal.Extension of Replacement Period for Property Lost Due to Floods or Tornadoes inthe Midwestern Disaster Zone. Present law allows taxpayers not to recognize gain withrespect to homes that are damaged or destroyed as a result of a presidentially-declareddisaster if the taxpayer replaces the property within a four-year period. Business propertythat is destroyed must be replaced within a two-year period to avoid gain recognition.
The proposal extends the replacement period to five years for principal residences andbusiness property that was damaged or destroyed within any presidentially-declareddisaster area for the Midwestern disaster. The extended replacement period applies toprincipal residences and business property, and the replacement property must be locatedin the Midwestern disaster area.
RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR INDIVIDUALASSISTANCE OR INDIVIDUAL AND PUBLIC ASSISTANCE
The proposals immediately below benefit individuals and businesses located in allcounties in the ten states above presidentially-declared (FEMA) major disaster areasdetermined to warrant individual assistance, or individual and public assistance, due toflooding, tornadoes, or severe storms.
Relief for Individuals and Families
Employee Retention Credit. This proposal provides a 40 percent tax credit for wagespaid up to $6,000 if paid after the applicable disaster date, and before January 1, 2009, byemployers with 200 or fewer employees located in the Midwestern disaster area whocontinue to pay their employees while their business is inoperable.
Representations Regarding Income Eligibility. Allows operators of qualifiedresidential rental projects to rely on the representations of prospective tenants displacedby the Midwestern disaster for purposes of determining whether the individuals satisfythe income limitations for qualified rental projects. Individual's tenancy must beginduring the six-month period beginning on the date the individual was displaced by theMidwestern disaster.
Expansion of Hope Scholarship and Lifetime Learning Credit. Current law allows aHope Scholarship Credit in the first two years of post-secondary education equal to 100%of the first $1,000 of qualified tuition and related expenses, and 50% of the next $1,000for a maximum credit of $1,500. There is also a Lifetime Learning Credit available tostudents enrolled in one or more courses at the undergraduate or graduate level (whetheror not pursuing a degree), equal to 20% of the first $10,000 in qualified tuition andrelated expenses. The proposal doubles the Hope Credit dollar amounts so the maximumcredit would be $3,000, and doubles the Lifetime Learning Credit percentage from 20%to 40%, for a maximum Lifetime Learning Credit of $4,000 for students attendingundergraduate or graduate institutions in the Midwestern disaster area. Room, board,books and fees would also be considered qualified expenses. This proposal applies to taxyears 2008 and 2009.
Secretarial Authority to Adjust Taxpayer and Dependency Status for Taxpayers.The Midwestern disaster has displaced thousands of individuals. Under present law, aprolonged change in a family’s living situation could affect its eligibility for various taxbenefits. The proposal gives the Treasury Department the authority to ensure taxpayersdo not lose deductions, credits or filing status because of dislocations from theMidwestern disaster.
Mortgage Revenue Bonds. Mortgage revenue bonds are tax-exempt bonds that stateand local governments generally issue through housing finance agencies. The proceedsfrom the bonds are used to fund below-market interest rate mortgages for certain firsttimehomebuyers meeting income and purchase price restrictions. The proposal allowsgreater access to mortgage revenue bond proceeds by lifting the first-time homeownerrequirement through 2010 for homes in the area damaged by the Midwestern disaster.Additionally, special income and purchase rules for targeted area residences apply so thatmore individuals and residences may qualify for financing. It also allows up to $150,000of the loan proceeds to be used for disaster-related repairs to damaged homes (as opposedto $15,000 under current law).
Tax Relief for Businesses
Tax-exempt Bonds. Provides Iowa, Arkansas, Illinois, Indiana, Kansas, Michigan,Minnesota, Missouri and Wisconsin the authority to issue a special class of qualifiedprivate activity bonds, called Midwestern disaster area bonds, outside of the state volumecaps. The maximum aggregate bond authority with respect to any state cannot exceed$1,000 times the portion of the state population which is located in a Midwestern disasterarea. Midwestern disaster area bonds can be issued by States and municipalities. Bondproceeds can be used to pay for acquisition, construction, and renovation ofnonresidential real property, qualified low income residential rental housing, and publicutility property (e.g., gas, water, electric and telecommunication lines) located in theMidwestern disaster area. The current low-income housing targeting rules are relaxed sothat more bond proceeds can be used to rebuild housing in the Midwestern disaster area.Interest payments on the bonds are not subject to the AMT. The authority to issueMidwestern disaster area bonds expires after December 31, 2010. In the case of projectinvolving a private business use, either the person using the property suffered a loss in atrade or business attributable to severe storms, tornadoes or flooding or is a persondesignated by the Governor of the State as a person carrying on a trade or businessreplacing a trade or business with respect to which another person suffered such loss. Inthe case of a project relating to public utility property, the project must involve the repairor reconstruction of public utility property damaged by sever storms, tornados orflooding.
Low Income Housing. Under current law, States receive allocations of low-incomehousing tax credits based on population. The proposal allows States to allocate volumesof additional housing credit amounts in years 2009, 2010, 2011 of $18 per person in theMidwestern disaster area measured by population data issued before the earliestapplicable disaster date for Midwestern disaster areas within the applicable state.Additional Depreciation. Permits businesses that suffered damage as a result of theMidwestern disasters to claim an additional first-year depreciation deduction equal to 50percent of the cost of new real and personal property investments made in theMidwestern disaster area. The additional deduction applies to purchased computersoftware, leasehold improvements, certain commercial and residential real estateexpenditures and equipment. All depreciation deductions (including bonus depreciation)would be exempt from the AMT. The proposal applies to property placed in servicethrough December 31, 2011 (December 31, 2012 for real property). In addition, theDepartment of Treasury would be granted authority, on a case-by-case basis, to extendthe bonus depreciation deadline for placing long-lived property in service in certaincircumstances for the Midwestern disaster area for up to one year.
Expensing Property. Current law permits certain small businesses to deduct up to$250,000 of the cost of property used in the business. The proposal would increase thisamount to $350,000 for qualifying expenditures made in the disaster area throughDecember 31, 2011 (December 31, 2012 for nonresidential real property and residentialrental property). This proposal would also increase the level of investment at whichbenefits phase out from $350,000 to $1.4 million of qualifying purchases, thus allowingmore businesses to use this tax benefit in rebuilding. This proposal applies to businessesthat suffered property damage in the Midwestern disaster area and that placed property inservice in the Midwestern disaster area after the date of the applicable disaster.Expensing Demolition and Clean-up Costs. Under the proposal, 50 percent of the costs(that would otherwise be capitalized) related to site cleanup and demolition would bedeductible by businesses. Effective for amounts paid or incurred beginning on theapplicable disaster date and ending on December 31, 2010.
Expensing Environmental Remediation Costs. The proposal extends the deductibilityof costs of cleaning up a qualified contamination site, if the release (or threat of release)or disposal of a hazardous substance is attributable to the disaster described in thePresidential declaration in the Midwestern disaster area. Effective for expenditures paidor incurred beginning on the applicable disaster date and ending on January 1, 2011.Increase in Rehabilitation Credit. For buildings that were damaged or destroyed in anapplicable disaster, the rehabilitation credit is raised from 10 percent to 13 percent ofqualified expenditures for any qualified rehabilitated building other than a certifiedhistoric structure, and the rehabilitation credit is raised from 20 percent to 26 percent ofqualified expenditures for any certified historic structure.
Five-year Net Operating Loss Carryback for Certain Amounts. The proposalextends the net operating loss carryback period from 2 to 5 years for net operating lossesattributable to (i) new investment and repairing existing investment in the areas damagedby the Midwestern disaster; (ii) business casualty losses caused by the Midwesterndisaster; and (iii) moving expenses and temporary housing expenses for employeesworking in areas damaged by the Midwestern disaster. The proposal is effective on thedate of enactment.
Tax Credit Bonds. Authorizes Midwestern disaster States to issue debt service taxcredit bonds providing credits against Federal income tax instead of interest payments, sothat these States can provide assistance to communities unable to meet their debt servicerequirements as a result of the flooding, tornadoes, and severe storms. The maturity ofthe bonds cannot exceed 2 years. At least 95 percent of bond proceeds must be used toredeem or to pay principal, interest or premiums on an outstanding bond, and suchproceeds so used must be matched by an equal amount of State funds. The maximumamount of tax credit bonds shall not exceed $100 million for any state with an aggregatepopulation located in the Midwestern disaster areas within such state of at least 2 million;$50 million for states with such populations of at least 1 million but less than 2 million;and zero for any other state.
Tax Incentives for Charitable Giving
Temporary Suspension of Limitations on Charitable Contributions. The amountallowed as a charitable deduction in any taxable year may not exceed ten percent of thecorporation’s taxable income or fifty percent of an individual’s adjusted gross income.The proposal temporarily waives these limits regarding charitable cash contributionsdedicated to Midwestern disaster relief efforts. The proposal is effective forcontributions paid during the period beginning on the earliest applicable disaster date forall States and ending on December 31, 2008.
Increase in Standard Mileage Rate for Charitable Use of Vehicles. The mileage rateindividuals may use to compute a tax deduction for personal vehicle expenses associatedwith charitable work is statutory and has not been increased since 1997 and is currently at14 cents per mile. For a taxpayer assisting in relief efforts related to the Midwesterndisaster, the proposal sets the charitable mileage rate at approximately 35 cents per mile,which is seventy percent of the standard business mileage rate, beginning on theapplicable disaster date and ending on December 31, 2009.
Exclusion from Income of Mileage Reimbursements for Charitable Volunteers. Ingeneral, reimbursements received for operating expenses of a personal vehicle used inconnection with charitable work in excess of the statutory charitable mileage rate aretaxable income to the recipient. However, reimbursements for charitable mileageattributable to the Midwestern disaster up to the amount of the standard business mileagerate will not be considered taxable income through December 31, 2009.
Enhanced Deduction for Donations of Food and Book Inventory. The proposalextends an enhanced deduction for donations of food inventory to all businesses throughDecember 31, 2009. Under present law, a taxpayer’s deduction for charitablecontributions of inventory generally is limited to the taxpayer’s basis (typically cost) inthe inventory. However, for contributions of food inventory, C corporations may claiman enhanced deduction equal to the lesser of (1) basis plus one-half of the item’sappreciated value (i.e., basis plus one half of fair market value in excess of basis) or (2)two times basis. The proposal extends the enhanced deduction for donations of foodinventory to non-C corporation businesses. The proposal establishes an enhanceddeduction for donations of book inventory through December 31, 2009. Under presentlaw, taxpayers may claim an enhanced deduction equal to the lesser of (1) basis plus onehalfof the item’s appreciated value (i.e., basis plus one half of fair market value in excessof basis) or (2) two times basis for donations of book inventory. The proposal extendsthe enhanced charitable deduction to donations of educational books to public schools.
Tax benefits not available with respect to certain property. The proposals relating toadditional first-year depreciation, increased expensing, and the five-year carryback ofNOLs do not apply with respect to certain property. Specifically, as was done in the taxrelief package for the Katrina disaster, the tax relief provisions do not apply with respectto any private or commercial golf course, country club, massage parlor, hot tub facility,suntan facility, or liquor store. The proposals also do not apply with respect to anyproperty used directly in connection with gambling, animal racing, or the on-site viewingof such racing, and with respect to buildings or portions of buildings dedicated to suchactivities (except if the portion so dedicated is less than 100 square feet).
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