Hurricane Katrina Tax Breaks

Thankfully, Congress has reacted quickly to Hurricane Katrina by passing the Katrina Emergency Relief Act of 2005 within three weeks of Katrina’s devestation of the Gulf coast. This legislation provides for some major tax breaks for those living in the affected areas as well as tax breaks for those living elsewhere who are providing donations and assistance for the victims.

Below are some of the major provisions of the Katrina Emergency Relief Act of 2005.

1. Families will not lose tax benefits due to temporary relocations.

For example, taxpayers can retain dependency exemptions for children who

may have gone to live in another state with relatives after the storm.

2.Families will not be taxed on forgiven debt.

Usually, forgiven debt is taxable income, but individuals affected by the

hurricane will not have taxable income arising from forgiven debt, such as

cancellation of a mortgage.

3.Tax relief is provided to individuals who provide rent-free housing to dislocated persons.

The deduction is $500 for each dislocated person housed in an individual’s

principal residence to a maximum of $2000.

4.Personal casualty losses are fully deductible.

The Act waives the provision that only casualty losses above 10 percent of an

individual’s adjusted gross income and exceed a $100 floor are tax deductible.

5. 10 percent early withdrawal penalty from IRA’s and pensions are waived.

To ease the financial burden of those living in the disaster area, the Act

allows eligible individuals to withdraw a maximum of $100,000 from their

IRAs and pensions without paying the 10 percent early withdrawal penalty.

Also, the regular income tax due on the early withdrawal may be paid over

three years or repaid back to the IRA or pension plan over a three year

period and receive rollover treatment.

For other information of Hurricane Katrina tax relief, go to www.irs.gov and click on “Help For Hurricane Victims.”