Hurricane Katrina Tax Relief

By Carr, Rebecca; Quinn, Tina | The CPA Journal, March 2006 | Go to article overview

Hurricane Katrina Tax Relief


Carr, Rebecca, Quinn, Tina, The CPA Journal


A Summary of Provisions for Affected Individuals, Businesses, and Charitable Donors

When Hurricane Katrina hit the Gulf Coast with a vengeance in August 2005, Congress acted to provide tax relief for its victims with the Katrina Emergency Tax Relief Act of 2005. It passed both houses of Congress by a unanimous vote, and President Bush signed the act into law on September 23, 2005. The act provides special rules for use of retirement funds, employment relief, charitable-giving incentives, and additional tax relief provisions. In addition to providing relief to individuals and businesses, the act includes tax breaks for relief workers. section 501 of the act declared an emergency requirement so the need for balancing of revenues and expenditures is suspended. Advisors should familiriaze themselves with the act's provisions and make efforts to determine who can benefit from it.

Key Terms

The act defines the "Hurricane Katrina disaster area" as the area declared a major disaster area by the President before September 14, 2005. The "core disaster area" means that part of the Hurricane Katrina disaster area that warrants individual or public assistance from the federal government The IRS has designated 31 Louisiana parishes, 47 Mississippi counties, and 10 Alabama counties as part of the core disaster area. (see www.irs.gov.) In addition, 33 Louisiana parishes, 35 Mississippi counties, 12 Alabama counties, and 11 Florida counties make up the remainder of the Hurricane Katrina disaster area

Title I

Title I of the act provides special rules relating to the use of retirement funds for relief relating to Hurricane Katrina Section 101 allows an eligible individual to withdraw up to $100,000 (in the aggregate) from retirement plans [e.g., IRA, 401(k)] without paying the 10% early-withdrawal penalty. In addition, these funds are not subject to the usual 20% mandatory withholding on withdrawals. Eligible individuals may pay income tax on the withdrawn amounts ratably over a three-year period. Also, if the withdrawals are recontributed to the plan within three years, the amounts will be given rollover treatment. If the taxpayer has previously filed a tax return and declared the withdrawals as income, he may file an amended return to get a refund. Eligible individuals are those whose principal place of abode on August 28, 2005, was located in the Hurricane Katrina disaster area and who suffered an economic loss from Hurricane Katrina.

Section 102 allows recontributions of qualified distributions from retirement plans for home purchases cancelled due to Katrina. These distributions must have been made after February 28, 2005, and before August 29, 2005. The recontributions will be treated as rollovers if made between August 25, 2005, and February 28, 2006. The funds from a qualified distribution must have been intended for the purchase or construction of a principal residence in the Hurricane Katrina area, and the purchase or construction could not take place because of Hurricane Katrina. Eligible individuals are those whose principal place of abode on August 28, 2005, was located in the Hurricane Katrina disaster area and who suffered an economic loss from Hurricane Katrina.

Section 103 increases the loan limit from a qualified employer plan from $50,000 to $100,000 for qualified individuals if the loan takes place after September 23, 2005, and before January 1, 2007. For the purposes of this section, a qualified individual is one whose principal place of abode on August 28, 2005, was located in the Hurricane Katrina disaster area and who suffered an economic loss from Hurricane Katrina. This section also, under certain circumstances, delays the due date for repayments due after August 24, 2005, and before December 31, 2006.

Section 104 enumerates the rules for retroactive application of amendments made by this title or by regulation to existing retirement or annuity contracts. …

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