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| from Fred L. Herman This will be a continuously updated section of this website. I will post letters and important news for my clients and friends. Notification of updates will be on the opening page. NEWS and MORE Dear Friends, Clients and Colleagues: (April 17, 2006) Special Notice (from Fred Herman) - IRS Eliminates Limits Special Notice (from Fred Herman) - IRS on Qualified Disaster Relief Payments Special Notice (from Fred Herman) - IRS fact sheet 2006-12 (January 11, 2006) IRS outlines tax breaks for small businesses in the Gulf Region
State of LA ...refund of state sales tax on losses not covered by
insurance >> go to
Special Notice to everyone affected by Hurricane Katrina Dear Friends, Clients and Colleagues: We are pleased to announce that we returned to our New Orleans offices on January 16, 2006. I wish to express my heartfelt appreciation to the many colleagues and friends who extended a helping hand during this troubled time. With their help we were able to find living accommodations and secure our families, find office accommodations and preserve our equipment and data bases and files, and keep in contact with you. I have always been very proud of our profession and the hard work we do for our clients and the manner in which we conduct ourselves. The professionalism that is typically displayed on a daily basis often goes unnoticed. Hurricane Katrina has brought out the best and the worst of human nature. My experience post Katrina, particularly with my colleagues and the judiciary demonstrated over and over again that the overwhelming majority of us are very kind and generous. We serve in a noble profession with good men and women who rose to the occasion and gave unselfishly to one another and those less fortunate. I wish to express a special thanks to my assistants Kathy Frught and Sandy Dennis who made tremendous sacrifices as they traveled to and from our various locations and to Tom Barbera and Dan Nodurft who were able to accomplish many of the tasks so necessary to serving the needs of our clients. All of you acted unselfishly while providing for the security of your families. As always, we are here to help you and look forward to the task of rebuilding with renewed spirit and with gratitude and humility. FRED HERMAN fherman@acadiacom.net TOM BARBERA tombarbera@cox.net DAN NODURFT nodurftd@cox.net KATHY FRUGHT, Legal Assistant kfrught@gmail.com SANDRA DENNIS, Legal Assistant sdennis02@hotmail.com
Limits
Eliminated for Hurricane Katrina Victims Deducting Casualty, ¶ 9.12 Qualified Disaster Relief PaymentsSection 139, added to the Code by The Victims of Terrorism Tax Relief Act of 2001, excludes “qualified disaster relief payments” from gross income. Although the provision was enacted in response to the events of September 11, 2001, its scope is much broader. Qualified disasters include disasters resulting from “terroristic or military action,” presidentially declared disasters, disasters resulting from accidents involving common carriers or from any other events determined by the IRS to be of a catastrophic nature, and disasters determined by a governmental authority to warrant government assistance. 87 The statute recognizes four types of qualified disaster relief payments: (1) reimbursement or payment for personal, family, living, or funeral expenses related to a qualified disaster; (2) reimbursement or payment for the expenses of repairing a personal residence (or repairing or replacing its contents) in response to a qualified disaster; 88 (3) payments made by a common carrier by reason of death or personal injuries resulting from a qualified disaster; and (4) general welfare payments made by a federal, state, or local government in connection with a qualified disaster. 89 For all four categories, the exclusion applies only to the extent expenses covered by payments are not otherwise compensated for (e.g., by insurance). In addition, according to the Joint Committee on Taxation, the exclusion does not apply to any payments in the nature of income replacement. 90 As long as the amount of payments “can be reasonably expected to be commensurate with the expenses incurred,” payment recipients do not have to account for actual expenses in order to qualify for the exclusion. 91 A special rule provides that the exclusion applies to any amounts received by September 11 victims pursuant to the Air Transportation Safety and System Stabilization Act. 92 Many
of the payments excluded by § 139 would be at least arguably excluded in any
event–for example, under the nonstatutory general welfare exclusion, the
§ 104(a)(2) exclusion for damages on account of personal physical injuries,
or the § 102 exclusion for gifts.
93 According to the Joint Committee, the enactment of § 139
creates no inference as to the taxability under prior law of payments
covered by the new provision.
94 In addition, the fact that a payment is not within the scope of
§ 139 creates no inference that it is not excludable under the general
welfare exclusion or some other Code provision.
95
IRC
§ 139(c).
A
rented residence can qualify as a personal residence for purposes of the
exclusion. Staff of the Joint Comm. on Tax'n, 107th Cong., 1st Sess.,
Technical Explanation of the “Victims of Terrorism Tax Relief Act of 2001,”
90 (JCX-93-01, Dec. 21, 2001). According to the Joint Committee, the tax
basis of a rehabilitated residence is to be determined using the rules
applicable to involuntary conversions of personal residences (§§ 121(d)(5),
1033(b), and 1033(h)). In some cases, then, § 139 will act as a deferral
provision, rather than as a permanent exclusion.
IRC
§ 139(b).
Staff
of the Joint Comm. on Tax'n, 107th Cong., 1st Sess., Technical Explanation
of the “Victims of Terrorism Tax Relief Act of 2001,” at 16 (JCX-93-01, Dec.
21, 2001).
Staff
of the Joint Comm. on Tax'n, 107th Cong., 1st Sess., Technical Explanation
of the “Victims of Terrorism Tax Relief Act of 2001,” at 16 (JCX-93-01, Dec.
21, 2001).
IRC
§ 139(f).
See
supra ¶ 9.01 (general welfare exclusion), ¶ 7.03 (damages for personal
physical injuries), ¶ 5.02 (gifts).
Staff
of the Joint Comm. on Tax'n, 107th Cong., 1st Sess., Technical Explanation
of the “Victims of Terrorism Tax Relief Act of 2001,” at 15 (JCX-93-01,Dec.
21, 2001).
Staff
of the Joint Comm. on Tax'n, 107th Cong., 1st Sess., Technical Explanation
of the “Victims of Terrorism Tax Relief Act of 2001,” at 15 (JCX-93-01, Dec.
21, 2001). A new IRS fact sheet explains key tax breaks for individuals provided by the recently enacted Gulf Opportunity Zone Act of 2005 (GO Zone Act), which was signed into law on Dec. 21, 2005 as P.L. 109-135, and its predecessor, the Katrina Emergency Tax Relief Act of 2005 (KETRA), which was signed into law on Sept. 23, 2005 as PL 109-73. RIA observation: Many of the new tax breaks are limited to geographic areas that are defined but not spelled out in detail in the legislation. The fact sheet addresses this by providing detailed lists of the specific geographic areas to which many of the tax breaks are tied. Background. KETRA had provided a package of income tax relief provisions to help victims of Hurricane Katrina. The GO Zone Act extends some of the KETRA income tax relief measures to victims of Hurricanes Rita and Wilma. Technically, the GO Zone Act accomplishes this by repealing certain KETRA provisions as of Dec. 21, 2005 (the GO Zone Act's effective date) and incorporating them into broader GO Zone Act provisions that benefit victims of Hurricanes Katrina, Rita and Wilma. RIA observation: The fact sheet mostly focuses on the GO Zone Act and KETRA tax changes for individuals. It does not provide coverage of the GO Zone Act's capital recovery provisions, NOL changes, or business tax credit changes. For details on these and other GO Zone Act and KETRA changes, see RIA's Complete Analysis of the Gulf Opportunity Zone and Katrina Emergency Tax Relief Acts of 2005 on Checkpoint. Key definitions. Various tax breaks in the GO Zone Act are tied to one or more of the following geographic areas: the Gulf Opportunity Zone (GO Zone), Rita GO Zone, Wilma GO Zone, Hurricane Katrina disaster area, Hurricane Rita disaster area and Hurricane Wilma disaster area. The Fact Sheet defines these areas as follows: Gulf Opportunity Zone (GO Zone): * In Alabama, the following counties: Baldwin, Chocktaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens, Sumter, Tuscaloosa, and Washington Counties; * In Louisiana, the following parishes: Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Pointe Coupee, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Mary, St. Martin, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge and West Feliciana; and * In Mississippi, the following counties: Adams, Amite, Attala, Claiborne, Choctaw, Clarke, Copiah, Covington, Forrest, Franklin, George, Greene, Hancock, Harrison, Hinds, Holmes, Humphreys, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston and Yazoo. The Hurricane Katrina disaster area: Alabama, Florida, Louisiana and Mississippi. Rita GO Zone: * In Louisiana, the parishes of Acadia, Allen, Ascension, Cameron, Calcasieu, Beauregard, Evangeline, Iberia, Jefferson, Jefferson Davies, Lafayette, Lafourche, Livingston, Plaquemines, Sabine, St. Landry, St. Martin, St. Mary, St. Tammany, Terrebonne, Vermilion, Vernon and West Baton Rouge; and * In Texas, the counties of Angelina, Brazoria, Chambers, Fort Bend, Galveston, Hardin, Harris, Jasper, Jefferson, Liberty, Montgomery, Nacogdoches, Newton, Orange, Polk, Sabine, San Augustine, San Jacinto, Shelby, Trinity, Tyler and Walker. The Hurricane Rita disaster area: Texas and Louisiana. Wilma GO Zone: Consists of the following Florida counties: Brevard, Broward, Collier, Glades, Hendry, Indian River, Lee, Martin, Miami-Dade, Monroe, Okeechobee, Palm Beach and St. Lucie. The Hurricane Wilma disaster area: Florida. RIA observation: The above definitions come into play with respect to many of the capital cost recovery provisions, NOL changes, and business tax credits, which as noted above, are not discussed in the fact sheet. For details, see RIA's Complete Analysis of the Gulf Opportunity Zone and Katrina Emergency Tax Relief Acts of 2005 on Checkpoint. Tax breaks for individuals. In general, for individuals affected by Hurricanes Katrina, Rita and Wilma, the new legislation provides tax-favored early distributions and loans from retirement accounts, eliminates limitations on claiming losses, and permits certain earned income tax credit (EITC) and refundable child tax credit recipients to choose either tax year 2005 or 2004 to determine their earned income and use the more beneficial result. KETRA allows affected individuals to exclude certain cancellations of debt income and extends, from two years to five years, the replacement period for converted properties. The GO Zone Act also provides educational assistance by expanding the Hope and Lifetime Learning credits for students enrolled and paying tuition at eligible educational institutions in the GO Zone for tax years beginning in 2005 or 2006. Removal of loss limitations. Ordinarily, to figure a deduction for a casualty or theft loss of personal-use property from a particular disaster, taxpayers must reduce the loss by $100 and also reduce their total casualty and theft losses by 10% of their adjusted gross income. Only the excess over these $100 and 10% limits is deductible. The GO Zone Act removes these limits for Hurricanes Katrina, Rita and Wilma victims on losses of personal-use property, so that the entire amount of unreimbursed losses is deductible. To qualify, a loss must arise in the Hurricane Katrina disaster area after Aug. 24, 2005 and must be attributable to Hurricane Katrina, or arise in the Hurricane Rita disaster area after Sept. 22, 2005 and must be attributable to Hurricane Rita, or arise in the Hurricane Wilma disaster area after Oct. 22, 2005 and must be attributable to Hurricane Wilma. Cancellation of debt. Individuals living in the Hurricane Katrina disaster area on Aug. 25, 2005, won't include in income a non-business debt that is cancelled, if the debt is not secured by property outside the Hurricane Katrina disaster area. Earned income tax credit and refundable child tax credit. Eligible individuals may choose to calculate their earned income tax credit(EITC) or refundable child tax credit using their earned income from the prior tax year. An eligible individual is: * One whose main home on Aug. 25, 2005, was in the GO Zone or who was displaced from the home he lived in on Aug. 25 in the Hurricane Katrina disaster area; or * One whose tax year included Sept. 23 and whose main home on Sept. 23 was in the Rita GO Zone or who was displaced from the home he lived in on Sept. 23 in the Hurricane Rita disaster area; or * One whose tax year included Oct. 23 and whose main home on Oct. 23 was in the Wilma GO Zone or who was displaced from the home he lived in on Oct. 23 in the Hurricane Wilma disaster area. These individuals may choose to use their prior year's earned income in calculating the EITC and the refundable child tax credit if their 2004 earned income was higher than their 2005 earned income. Retirement funds. To help victims of Hurricane Katrina, Rita and Wilma, the GO Zone Act liberalizes the rules for early distributions, plan loans and recontributions. Early distributions from retirement plans. To qualify for tax-favored treatment, the distribution must be made on or after Aug. 25, 2005, and before Jan. 1, 2007, from an eligible retirement plan such as a qualified plan or an IRA, to an eligible individual. An eligible individual is: * someone whose main home was in the Hurricane Katrina disaster area on Aug. 28, 2005, and who sustained an economic loss from Hurricane Katrina; * or for a distribution made on or after Sept. 23 and before Jan. 1, 2007, an individual whose main home was located in the Hurricane Rita disaster area on Sept 23, 2005 and who sustained an economic loss from Hurricane Rita; or for a distribution made on or after Oct. 23, 2005 and before Jan. 1, 2007, an individual whose main home was located in the Hurricane Wilma disaster area on Oct. 23, 2005 and who sustained an economic loss from Hurricane Wilma. The total amount of tax-favored distributions an individual can receive from all plans, annuities or IRAs is $100,000. An individual who receives these qualified retirement distributions does not have to pay the 10% additional tax on early distributions. The distributions generally are included in income, ratably over a three-year period. However, if the individual recontributes a qualified distribution that is eligible for tax-free rollover treatment into an eligible retirement plan within three years, the distribution will be treated as though it were paid in a direct rollover. Qualified distributions are not subject to 20% withholding. Retirement plan loans. For an eligible individual, defined above, with an outstanding loan on or after Aug. 25, Sept. 23 or Oct. 23, as applicable, from a qualified employer plan, if the due date for any repayment on the loan occurs during the period beginning on Aug. 25, Sept 23, or Oct. 23, 2005, and ending on Dec. 31, 2006, the due date is delayed for one year. Any payments after the suspension period will be appropriately adjusted to reflect the delay and any interest accruing during the delay. Under the GO Zone Act, the allowable loan amount for eligible individuals is increased from $50,000 to $100,000. To figure the dollar limit, an individual starts with (a) $100,000 and subtracts the highest outstanding balance of loans from these plans during the prior year and compares that figure to (b) his vested benefit under the plan. Whichever figure is less is the limit that the individual can borrow from his employer's plans without current tax consequences. Recontributions to retirement plans are available as follows: * In the case of Hurricane Katrina, a qualified individual who, after Feb. 28, 2005, and before Aug 29, 2005, took a distribution (e.g., hardship distribution from a 401(k) plan or 403(b) annuity or a qualified first-time homebuyer distribution from an IRA), to buy or build a home in the Hurricane Katrina disaster area, but didn't buy or build it as a result of Hurricane Katrina, may recontribute the funds to an eligible retirement plan. Any amount recontributed is treated as having been paid in a direct rollover. To qualify or this treatment, the individual must recontribute the funds during the period beginning on Aug. 25, 2005 and ending on Feb. 28, 2006. * In the case of Hurricane Rita, a qualified individual who after Feb. 28, 2005 and before Sept. 24, 2005, took a distribution (e.g., hardship distribution from a 401(k) plan or 403(b) annuity or a qualified first-time homebuyer distribution from an IRA), to buy or build a home in the Hurricane Rita disaster area, but didn't buy or build it as a result of Hurricane Rita, may recontribute the funds to an eligible retirement plan. Any amount recontributed is treated as having been paid in a direct rollover. To qualify for this treatment, the individual must recontribute the funds during the period beginning on Sept 23, 2005 and ending on Feb. 28, 2006. * In the case of Hurricane Wilma, a qualified individual, who after Feb. 28, 2005 and before Oct 24, 2005, took a distribution (e.g., hardship distribution from a 401(k) plan or 403(b) annuity or a qualified first-time homebuyer distribution from an IRA), to buy or build a home in the Hurricane Wilma disaster area, but could not buy or build it as a result of Hurricane Wilma, may recontribute the funds to an eligible retirement plan. Any amount recontributed is treated as having been paid in a direct rollover. To qualify for this treatment, the individual must recontribute the funds during the period beginning on Oct. 23, 2005 and ending on Feb. 28, 2006. IRS is drafting Form 8915, which taxpayers will use to report distributions, determine the amount included in income, and report any recontributions made during the tax year. Charitable provisions. To encourage charitable giving, KETRA and the GO Zone Act suspend the limits on certain charitable contributions, create an exemption for those housing Hurricane Katrina displaced individuals, increase the standard mileage rate for charitable use of vehicles and exclude from gross income mileage reimbursements to charitable volunteers. New publication forthcoming. IRS says it will provide a full explanation of KETRA and the GO Zone Act in Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma, which will be available on IRS.gov by February 2006. Source: Federal Taxes Weekly Alert (preview)
01/12/2006, Volume 52, No. 02
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