Summary of Grassley-Baucus Hurricane Katrina Tax Relief Package
GRASSLEY-BAUCUS TAX RELIEF PACKAGE FOR INDIVIDUALS AFFECTED BY HURRICANE KATRINA
1. Discharge of Indebtedness Related to Katrina: Gross income generally includes any amountrealized from the discharge of indebtedness. The proposal would provide an exemption forindebtedness discharged by commercial lenders when the forgiveness is in response to damagesuffered from Hurricane Katrina. Senators Grassley and Baucus believe that those suffering lossesas a result of the hurricane should not be required to pay tax on benevolent cancellation of debts.
2. Early Withdrawals from Retirement Plans: Present law discourages distributions from taxpreferredretirement plans with penalties and other limitations. The proposal would waive the 10%penalty tax for premature distributions from IRAs and qualified retirement plans (including definedbenefit plans, 401(k) plans and 403(b) plans) for individuals whose principal residence is in afederally declared natural disaster area. Individuals eligible for this waiver because of Katrina wouldbe permitted to pay income tax on such distributions ratably over a three-year period. Amountsdistributed could be re-contributed to a qualified retirement plan over the three-year period followingthe distribution date and receive rollover treatment. Distributions for home purchases which werenot finalized because of Hurricane Katrina could also be re-contributed to a qualified retirement planor IRA. Limitations on loans from qualified employer plans would be increased for HurricaneKatrina victims by doubling the thresholds to the lesser of $100,000 or 100% of the individual’saccount balance. Payments due from Katrina victims on qualified plan loans after August 29, 2005,and before August 30, 2006, could be deferred, and twelve months could be added to the maximumrepayment period of affected loans. Senators Grassley and Baucus recognize that retirement plansare the primary savings for many individuals. During major disasters the tax code should not preventindividuals in need from accessing their savings.
3. Extension of WOTC to Katrina Victims. Under current law, the Work Opportunity Tax Creditallows employers to claim a credit against wages paid to new workers that face barriers toemployment. It applies to special groups such as residents of empowerment zones, TANF-eligiblefamilies, high-risk youth, veterans, SSI beneficiaries, and voc-rehab referrals. The credit max is$2,400 (40% of first year wages up to $6,000, or 25% of wages if less than 400 hours worked). Theproposal establishes an additional category of eligible new workers under the WOTC credit forHurricane Katrina survivors, provided that the worker lived within the disaster zone and becameunemployed as a result of damage or destruction to his or her workplace.
· Employers outside the disaster area may hire qualifying employees from the disaster area for oneyear (August 28, 2005, to August 28, 2006). A change of employer is required.
· Employers inside the disaster area may hire qualifying employees from the disaster area for threeyears (August 28, 2005, to August 28, 2008). A change of employer is required.
Hurricane Katrina victims who are willing and able to work will face many hardships includinghomelessness, health problems, and loss of documentation verifying eligibility. The WOTC creditexists to help employees who are currently facing barriers to employment. Hurricane survivors willface a unique set of barriers and need assistance in finding employment.
4. Katrina Disaster Employee Retention Credit. Current law allows employers to deduct the costof salaries paid to employees. This proposal would provide a 40% tax credit for wages paid up to$6,000 if paid after August 28, 2005, and before December 31, 2005, by employers located in thedisaster zone. Also, the employee’s usual and principal place of work must have been in the disasterzone, but the credit is not affected if the employee reports to work at another location. Employersof activated military Reservists and Guards would also be eligible for this credit as many have beenparticipating in a “pay protection” effort. Wages paid to relatives would be ineligible for the credit.Many of these businesses are not operating at all and are tapping into savings to keep their workforcetogether during this tragedy. Senators Grassley and Baucus believe the government should assist theloyal employers who are doing the right thing and keeping their workers on payroll.
5. Incentive for Housing Aid: Current law provides a personal exemption for taxpayers, spouses,and dependents. The deduction amount for 2005 is $3,200. The proposal would provide taxpayerswho house dislocated persons from Hurricane Katrina for a minimum of sixty days in their principalresidences an additional personal exemption of $500 per dislocated person (maximum $2,000deduction). This additional exemption is not eligible for any person already claimed on thetaxpayer’s return. This provision would not affect any deductions or exemptions due to thedislocated person on his or her tax return. This proposal will help defray some of the costs incurredby compassionate neighbors and encourage others to do the same.
6. Relax Restrictions on Mortgage Revenue Bonds: Mortgage revenue bonds are tax-exemptbonds that state and local governments generally issue through housing finance agencies. Theproceeds from the bonds are used to fund below-market interest rate mortgages for certain first-timehomebuyers meeting income and purchase price restrictions. Senators Grassley and Baucus believethat it is important to support home ownership in the area impacted by Katrina. The proposal wouldprovide greater access to mortgage revenue bond proceeds by lifting the first-time homeownerrequirement and relaxing the purchase price and income limitations for homes in the area damagedby Katrina for the three years following the disaster.
Charitable Giving; Taxpayer Assistance and Protection
7. Encourage Food Donations by Businesses: The proposal provides an enhanced deduction fordonations of food inventory for businesses through December 31, 2005. Under present law, ataxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’sbasis (typically cost) in the inventory. However, for contributions of food inventory, C corporationsmay claim an 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 timesbasis. The proposal would allow all taxpayers to claim an enhanced deduction for donations of foodinventory equal to the lesser of fair market value or twice basis. Senators Baucus and Grassley wantto encourage farmers, ranchers, food producers, and sellers to donate surplus food inventory duringthis period when so many are relying on assistance.
8. Encourage Book Donations by Businesses: The proposal provides an enhanced deduction fordonations of book inventory through December 31, 2005. Under present law, taxpayers may claiman enhanced deduction equal to the lesser of (1) basis plus one-half of the item’s appreciated value(i.e., basis plus one half of fair market value in excess of basis) or (2) two times basis for donationsof book inventory. The proposal would allow taxpayers to claim an enhanced deduction fordonations of book inventory equal to the lesser of fair market value or twice basis. Senators Baucusand Grassley understand that with the influx of many dislocated children in the wake of hurricaneKatrina, many schools across the country lack the supplies they need to handle the additional studentpopulation. This proposal is intended to encourage donations of books to schools and othereducational programs during this period.
9. IRA Charitable Rollover: The provision would exclude from gross income otherwise taxableIndividual Retirement Account (IRA) withdrawals from a traditional or a Roth IRA for qualifiedcharitable distributions. Under the provision, taxpayers who are 70½ and older would be allowed torollover amounts from their IRA accounts directly to a qualified charitable organization on a tax-freebasis. In addition, the provision allows taxpayers aged 59½ and older to transfer IRA funds to acharitable remainder trust and give a remainder trust and give a remainder interest in the trust tocharity without tax consequence. Senators Baucus and Grassley believe that removing obstacles fortaxpayers to donate their IRAs to charity during this difficult period will provide an importantincentive to give to charities. The provision would be effective through December 31, 2005.
10. Corporate Charitable Contributions: The amount allowed as a charitable deduction for acorporation in any taxable year may not exceed ten percent of the corporation’s taxable income. Theproposal would temporarily increase the percentage limitation to fifteen percent of the corporation’staxable income for one taxable year ending on or before December 31, 2006.
11. Individual Income Limits for Cash Contributions: The proposal raises the permitted cashcontribution level for individuals from fifty percent to sixty percent of adjusted gross income for taxyears ending on or before December 31, 2005.
12. Encourage IRS Information-sharing with State Charity Officials: This proposal allows theIRS to disclose to appropriate state officials information regarding organizations for which the IRShas denied or revoked tax-exempt status or certain other actions the IRS may have taken.Unfortunately, there have already been numerous news reports of scam artists creating fraudulentcharities to take advantage of Americans who want to help the victims of Katrina. Senators Grassleyand Baucus want to ensure that the IRS and state officials are working closely together to combatfraudulent charitable organizations taking advantage of a generous public.
13. Taxpayer Assistance: To ensure that families and businesses receive the full benefit of theseproposed tax relief provisions, it is vital that the IRS be able to provide significant taxpayerassistance to those affected and to administer effectively the tax relief provisions proposed today.Some of these provisions encourage charitable giving, allow taxpayers to access retirement fundswithout penalty, and expand the availability of tax-exempt bonds for rebuilding homes. In addition,the IRS is expediting reviews of applications from new organizations seeking tax-exempt status aswell as requests from donors seeking to verify an organization’s tax-exempt status. This proposaldedicates all fees from employee plan and exempt organization letter rulings and determinationletters to IRS for its own disaster recovery, tax relief administration and assistance and foradministration of tax-exempt entities and charitable donations. Current law provides that only aportion of these fees are dedicated for the use of the IRS.
14. Increased Mileage Rate for Calculating Charitable Contribution Mileage Deduction: Themileage rate individuals may use to compute a tax deduction for personal vehicle expensesassociated with charitable work is statutory and has not been increased since 1997. This proposal setsthe charitable mileage rate at fifty percent of the standard business mileage rate that is determinedperiodically by the Internal Revenue Service. Making the rate flexible by linking it to the businessrate takes fluctuations in gas prices into account and will encourage charitable activity.
15. Casualty Loss Provision. Under present law, non-business casualty losses are deductible bytaxpayers who itemize only to the extent they exceed ten percent of adjusted gross income and a onehundreddollar floor. In some circumstances, taxpayers are permitted to include a current-yearcasualty loss on an amended prior year return. The proposal eliminates the ten percent floor forcasualty losses incurred in the Hurricane Katrina disaster area, including those claimed on amendedreturns. Removing the floor will result in increased loss deductions and the amended return optionwill get money to the victims much sooner, helping them to get back on their feet.
16. Section 1033(h) Involuntary Conversions. Present law allows taxpayers not to recognize gainwith respect to homes that are damaged or destroyed as a result of a presidentially declared disasterif the taxpayer replaces the property within a four-year period. Business property that is destroyedmust be replaced within a two-year period to avoid gain recognition. The proposal extends thereplacement period to five years for a taxpayer to purchase property to replace property that wasdamaged or destroyed within the presidentially declared disaster area for Katrina. The extendedreplacement period applies to principal residences and business property.
17. IRS Administrative Relief: The Internal Revenue Code authorizes the Secretary to extenddeadlines for up to one year to file tax returns and to make payments and deposits for income, estateand gift taxes. Employment taxes are specifically excluded and excise taxes are not specificallyincluded. The IRS issued a notice for victims of Katrina extending the time period until January 3,2006, to file any returns, pay any taxes or make any deposits due. Although this is intended to applyto employment and excise taxes, it is unclear that the IRS has the authority to do so. This proposalextends the deadlines until February 28, 2006, and clarifies that the extension includes employmentand excise taxes in addition to income, estate and gift taxes. Penalties and interest that wouldotherwise apply are waived.
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