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October 16, 2005 - Does the recently passed Katrina Emergency Tax Relief Act of 2005 have any impact on me if I was not residing or doing business in the disaster area?

Despite its title, the Katrina Emergency Tax Relief Act of 2005 (KETRA) does not offer relief to just taxpayers in those parishes and counties designated as disaster areas by the President. Some of the KETRA’s relief provisions apply to taxpayers whether or not they are located in the Katrina disaster area, including suspension of the usual limits on charitable deductions, and more generous rules for charitable contributions of food or book inventory.

Increased Charitable Deduction Limits:

The KETRA temporarily increases limitations on charitable deductions for an individual’s cash contributions made during a specified period and exempts such donations from the overall limitation on itemized deductions. Under the current law, individuals can deduct charitable contributions up to 50% of their Adjusted Gross Income (AGI). Deductions for charitable contributions are further limited by the phase-out of itemized deductions. Under the KETRA, cash donations to charities are exempt from the 50% AGI limitation and the phase-out of itemized deductions if the donations are made before 2006.

The KETRA also temporarily increases the limits on a corporation’s cash contributions, but only if made for Hurricane Relief. Under the current law, charitable contributions are not deductible by a corporation to the extent they exceed 10% of its taxable income. The KETRA waives the 10% income limitation for cash donations related to Hurricane Katrina if the donations are made before 2006.

Enhanced Charitable Deduction for Contributions of Food Inventories:

Under the current law, C corporations may deduct the cost of food inventory donations. The value of the deduction is equal to the lesser of two times cost basis or cost basis plus one-half of the appreciation in value. The KETRA extends the current law deduction for food donations to S corporations, partnerships and sole proprietors through the end of 2005. This enhanced deduction is effective for contributions made after August 28, 2005 and before January 1, 2006.

Enhanced Charitable Deduction for Contributions of Book Inventories:

The KETRA allows a charitable deduction through the end of 2005 for donations of educational books to public schools. The value of the deduction is equal to the lesser of two times cost basis or cost basis plus one-half of the appreciation in value. A qualified book contribution is a charitable contribution of books to a public school that provides elementary education or secondary education. This enhanced deduction is effective for contributions made after August 28, 2005 and before January 1, 2006.

Additional Exemptions for Housing Dislocated Persons:

The KETRA creates an additional personal exemption for individuals who provide rent-free housing to dislocated persons for at least 60 consecutive days. The deduction is $500 for each person housed in the individual’s principal residence (up to a maximum of $2,000). This additional personal exemption can be claimed in 2005 and 2006, but cannot be claimed in both years for the same person. The additional exemption is not subject to the income-based phaseouts applicable to other personal exemptions. The claiming of the additional exemption does not affect any deductions or exemptions due to the dislocated person on his or her tax return.

Using Personal Vehicle for Charitable Work:

Individuals can currently claim a tax deduction of 14 cents per mile for the costs associated with using a personal vehicle for charitable work. For a taxpayer providing relief related to Hurricane Katrina, KETRA sets the charitable mileage rate at 70% of the standard business mileage rate (currently 48.5 cents per mile). Furthermore, a volunteer who is reimbursed for charitable mileage attributable to Hurricane Katrina up to the business mileage rate does not have to pay income tax on the reimbursement. Both of these mileage provisions are effective through December 31, 2006.

Work Opportunity Tax Credit:

Employers may claim the work opportunity tax credit (WOTC) if they hire individuals from certain target groups who are considered to face barriers to employment. The KETRA creates a temporary WOTC target group called Hurricane Katrina employees, comprised of individuals who lived in an area that is now eligible for individual and public assistance under the Stafford Act. In addition to the employers in the disaster area qualifying for this credit, employers located outside of this disaster area may claim the WOTC for Hurricane Katrina employees hired beginning on August 28, 2005 through December 31, 2005. .

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