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The Tax Prophet Newsletter   Issue # 27 September, 2005

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In This Issue:
Introduction
Tax Incentives
Katrina-based Relief
Conclusion


Hurricane Katrina
Tax Breaks



Introduction

The recently enacted Katrina Emergency Tax Relief Act of 2005 provides new incentives for cash-based charitable gifts to public charities and specific tax relief for Hurricane Katrina victims.


Tax Incentives

Taxpayers making cash gifts to public charities before January 1, 2006 may deduct the full amount of the donation. The phase-out for itemized deductions will not apply. To qualify, the donation must:

  • Be in cash (appreciated assets do not qualify);

  • Be given between August 28, 2005 and before January 1, 2006; and

  • Go to a public charity, excluding donor-advised funds. (Note: Gifts to private foundations do not qualify.)

In general, the maximum deduction for qualified charitable contributions is increased to 100% of adjusted gross income.

Note: Although taxpayers may contribute distributions from IRAs and receive a full charitable deduction, the 10% early withdrawal penalty is not waived, which means those under age 59 ˝ will be penalized if they use IRA funds for charitable contributions.

Unfortunately, the 100% charitable deduction does not apply to funds donated to donor-advised funds, a popular form of giving which permits taxpayers to donate cash, stock or other assets to an account and then suggest which charities should receive the funds.


Katrina-based Relief

Katrina victims will not lose their tax benefits due to temporary displacement. Also, those who rent to evacuees are entitled to a special tax deduction. The 10% withdrawal penalty for premature distributions from IRAs and pensions is waived as well as the tax rule that treats cancellation of indebtedness as additional income.

Employers who hire Hurricane Katrina employees may claim a new credit equal to 40% of the first $6,000 of wages paid to a new worker in the first year.


Conclusion

Taxpayers over the age of 59 ˝ with large IRA accounts will be permitted to tap these funds for charitable donations on essentially a tax-free basis (the income received and the charitable deduction will offset). Taxpayers donating cash to public charities will receive a 100% charitable deduction (up from the present 50% in the year of donation). Regrettably, donations to donor-advised funds and private foundations are excluded from this favorable tax treatment.



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Copyright © 1995-2005 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.