TaxAlmanac:Featured article/September 22, 2005

From TaxAlmanac

Katrina Emergency Tax Relief Act of 2005

On September 21, 2005, Congress passed H.R. 3768, the Katrina Emergency Tax Relief Act of 2005. President Bush signed the bill into law on September 23, 2005. Congress is also expected to consider additional tax relief for Hurricane Katrina in the near future.

Technical Explanation of H.R. 3768, the Katrina Emergency Tax Relief Act of 2005: Joint Committee on Taxation

The TaxAlmanac website has been updated with the amendments to the Internal Revenue Code.

The following summary of the legislation has been provided by the Committee on Ways and Means just prior to passage of the bill.

RELIEF FOR INDIVIDUALS AFFECTED BY HURRICANE KATRINA

• Holds families harmless against the loss of tax benefits due to temporary relocations. Damage caused by the hurricane has displaced hundreds of thousands of individuals, who are temporarily living with family, friends or good Samaritans. Under current law, a prolonged change in their living situation could affect their eligibility for various tax benefits. The proposal allows individuals the option of using their 2004 income to calculate the child credit and the Earned Income Credit on their 2005 tax returns. This special rule applies to individuals who were displaced from their principal residence by reason of Hurricane Katrina. The proposal also grants the U.S. Treasury Department the authority to ensure that taxpayers do not lose tax benefits or experience a change in filing status in 2005 and 2006 due to temporary relocations.
• Ensures that families are not taxed on forgiven debt. Under current law, amounts realized from the discharge of indebtedness are generally treated as taxable income to the individual. The proposal ensures that individuals affected by the hurricane are not taxed on personal debt relief related to the hurricane, such as the cancellation of a mortgage, provided before 2007.
• Provides tax relief for housing assistance to dislocated persons. The proposal creates a special tax deduction for individuals who provide rent-free housing to dislocated persons for at least 60 days. The deduction is $500 for each dislocated person housed in the individual’s principal residence (up to a maximum of $2,000). The deduction can be claimed in either 2005 or 2006, but cannot be claimed in both years with respect to the same person.
• Allows full deductibility of personal casualty losses. Under current law, individuals who itemize their deductions may deduct personal casualty losses to the extent they exceed 10 percent of adjusted gross income and a $100 floor. The proposal waives the 10-percent and $100 floors, thus allowing individuals to fully deduct their losses.