VRPP Katrina Tax Relief Training for 2005

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VRPP Katrina Tax Relief Training for 2005

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Hurricane Katrina Disaster Area

• An area with respect to which a major disaster
  has been declared by the President before Sept
  14, 2005, under Section 401 of the Robert T.
  Stafford Disaster Relief and Emergency Assistance
  Act by reason of Hurricane Katrina.
• The following states are included in the
  Hurricane Katrina disaster area
• Louisiana
• Mississippi
• Alabama
• Florida

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The Katrina Emergency Tax Relief Act (KETRA) is
divided into five Titles

• Title ISpecial Rules for use of Retirement Funds
• Title IIEmployment Relief
• Title IIICharitable Giving Incentives
• Title IVAdditional Relief Provisions
• Title V Emergency Requirement

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Katrina I

• The goal of this presentation is to give an
  overview of the tax law changes related to the
• Katrina Emergency Tax Relief Act (KETRA) of 2005
• Primary Focus will be on the Tax Benefits
  available to the Individual Taxpayers serviced by
  the Volunteer Return Preparation Program (VRPP)

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OBJECTIVES

• At the end of this training you will be able to
• Define and list the Individual and Public
  Assistance Areas.
• Identify the deadlines for Hurricane Katrina
  impacted individuals to perform time-sensitive
  acts.
• Determine the VRPP tax law changes facilitated by
  four Titles of the Katrina Emergency Tax Relief
  Act (KETRA).
• Define who is eligible for the KETRA assistance
  using the Form 13614K.
• Assist taxpayers in reconstructing their 2005
  source documents (W-2, 1099, etc.).
• Accurately apply the KETRA tax law using the
  appropriate forms and schedules.
• Identify KETRA outreach and out-of-scope subject
  matter.

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Core Disaster Area

• That portion of the Hurricane Katrina disaster
  area determined by the President to warrant
  individual or individual and public assistance
  from the Federal Government under such act.

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Individual Assistance Areas

• Louisiana
• Mississippi
• Alabama
• Florida

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Public Assistance Areas

• Louisiana
• Mississippi
• Alabama
• Florida

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Deadlines for Taxpayers Affected by Hurricane
Katrina Extended

• Deadlines postponed until February 28, 2006, for
  certain taxpayers to
• File Tax Returns
• Pay Taxes
• Perform Other Time-Sensitive Acts
• This extension applies to deadlines - either an
  original or extended due date - that occur after
  August 28, 2005 (August 23, 2005 for Florida
  affected taxpayers), and before February 28, 2006
  affected by Hurricane Katrina.

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Application for Automatic Extension of Time to
File U.S. Individual Income Tax Return

• Whats New for Tax Year 2005 (All Taxpayers)
• Form 4868
• Automatic 6-month extension (No longer need Form
  2688)

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Title I, Section 101

• Tax Favored Withdrawals from Retirement Plans

• Present Law
• 10 early withdrawal penalty
• Change in Law
• Exception to 10 penalty
• Include in income ratably over 3 years
• 3-year recontribution

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Tax Favored Withdrawals from Retirement Plans

• Example
• On September 15, 2005, Mark withdrew 20,000
  from his retirement account to pay his living
  expenses due to Hurricane Katrina.
• Mark can elect to include the withdrawal in his
  income as follows
• Ratably over three years All in the
  first year
• 2005 6,666 2005
• 2006 6,666
• 2007 6,667

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Title I, Section 102

•  

• Present Law
• 10 early withdrawal penalty
• Change in Law
• Exception to 10 penalty
• Provides for rollover treatment

Recontributions of Withdrawals for Home Purchases
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Recontributions of Withdrawals for Home Purchases

•  

• Example
• On March 1, 2005, Joe took a 10,000 IRA
  distribution to purchase his first home. He
  purchased a lot on April 23, 2005, for 4,000.
  On August 29, 2005, Hurricane Katrina stopped the
  production.
• Joe tells you that on February 1, 2006, he
  recontributed 8,000 to a qualified plan.
• Only the 2,000 that he did not recontribute is
  subject to the 10 additional tax (Early
  Withdrawal Penalty).

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Title III, Section 301

•  

• Present Law
• Individuals may deduct charitable contributions
  up to a certain of their contribution base.
• Change in Law
• Temporarily exempts qualified contributions by
  individuals from the contribution base limits and
  the phase-out of itemized deductions for
  contributions made beginning August 28, 2005, to
  December 31, 2005.

Temporary Suspension of Limitations on Charitable
Contributions
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Temporary Suspension of Limitations on Charitable
Contributions (continued)

• Example
• Janice has a contribution base (AGI) of 40,000.
  She made contributions of 25,000 to her church
  on August 15, 2005, and 10,000 to the Family
  Violence Prevention Fund on September 15, 2005.
• Usually, her contribution limitation to these
  organizations would be 50 of her contribution
  base or 20,000 however, since the Prevention
  Fund contribution is a qualified contribution
  under the Katrina provisions, she is entitled to
  claim a deduction of 30,000 (20,000/church
  10,000/Family Violence Prevention Fund ).
• The contribution of 25,000 to her church is
  limited to a 20,000 deduction, since this
  contribution was made prior to the new Katrina
  provisions.

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Title III, Section 302

•  

• Present Law
• An individual can claim an exemption for
  themselves, their spouse (if filing jointly) and
  any dependents.
• Change in Law
• An extra 500 exemption for each Hurricane
  Katrina Displaced Individual housed in the
  taxpayers home (limit 4 individuals- 2000).

Additional Exemption for Housing Hurricane
Katrina Displaced Individuals
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Additional Exemption for Housing Hurricane
Katrina Displaced Individuals (continued)

• Example 1
• If Aunt Betty, a displaced Hurricane Katrina
  individual, moved in with the taxpayer in
  September 2005 and stayed until the end of 2006,
  the taxpayer may claim the additional exemption
  for her in 2005 or 2006, but not both years.

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Additional Exemption for Housing Hurricane
Katrina Displaced Individuals (continued)

• Example 2
• Aunt Kathy, a displaced Hurricane Katrina
  individual, moved in with Carolyn from September
  1, 2005, to December 1, 2005. When Carolyn filed
  her 2005 tax return, she claimed the additional
  exemption for Aunt Kathy. On December 2, 2005,
  Aunt Kathy moved in with Randy and stayed until
  the end of 2006. Randy cannot claim the
  additional exemption on his 2006 tax return for
  Aunt Kathy since the additional exemption has
  already been claimed by Carolyn in 2005.

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Additional Exemption for Housing Hurricane
Katrina Displaced Individuals (continued)

• Additional Clarifications
• The displaced individual may not be the spouse or
  dependent of the taxpayer.
• The taxpayer must provide the TINs of the
  displaced individuals.
• The exemption is not allowed if the TP receives
  any rent or other amount from any source in
  connection with providing housing for displaced
  individual.
• The additional exemption is not subject to income
  based phase-outs.

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Additional Exemption for Housing Hurricane
Katrina Displaced Individuals (continued)

•  

• Summary
• 500 additional exemption amount per individual,
  maximum of 2,000 per tax return
• The individual must live 60 consecutive days in
  taxpayers principal residence free of any
  charges or reimbursements
• Additional exemption cannot be for a spouse or a
  dependent
• Taxpayer must use Form 8914 to claim the
  additional exemption

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Title III, Section 303

•  

• Present Law
• Actual out-of-pocket expenditures or 14 cents per
  mile.
• Change in Law
• 70 of the Business Standard Mileage Rate in
  effect on the date of the contribution.

Increase in Standard Mileage Rate for Charitable
Use of Vehicles
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Increase in Standard Mileage Rate for Charitable
Use of Vehicles (continued)

• Example
• A taxpayer delivered water to Hurricane Katrina
  victims on August 28, 2005, and logged in 75
  miles. Their deduction, under the present law
  would have been 75 miles X .14 10.50.
• Under provisions of this act, the deduction would
  be 75 miles X .29 (70 of the business rate of
  .405 on 8/28/05) 21.75.

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Increase in Standard Mileage Rate for Charitable
Use of Vehicles (continued)

• Exercise
• If the taxpayer had delivered water on September
  1, 2005, and drove 75 miles. What will be their
  deduction?

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Increase in Standard Mileage Rate for Charitable
Use of Vehicles (continued)

• Answer
• 75 miles X .34
• (70 of the business rate of .485 on 9/1/05)
• 25.50.

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Title III, Section 304

•  

• Present Law
• Volunteers have taxable income to the extent the
  reimbursement exceeds the allowable charitable
  deduction.
• Change in Law
• Reimbursements excludable from income up to the
  amount of the Standard Mileage Rate in effect for
  Businesses.

Mileage Reimbursements to Charitable Volunteers
Excluded from Gross Income
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Mileage Reimbursements to Charitable Volunteers
Excluded from Gross Income (Continued)

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• Example
• On September 15, 2005, Frank volunteered to use
  his personal vehicle to deliver ice to New
  Orleans. He received 1500 in reimbursement from
  the Red Cross. Frank can exclude up to 48.5
  cents per mile for the 2,968 miles he drove.
• 2,968 x 48.5 1,439
• The 1,439 can be excluded from Franks gross
  income.
• The difference between the 1,439 and the 1,500
  received in reimbursement is taxable income.
• 1,500 - 1,439 61
• Frank will include 61as taxable income on his
  Tax Return.

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Title IV, Section 406

•  

• Present Law
• Credits based upon earned income for the current
  tax year.
• Change in Law
• Qualified individuals may elect to calculate
  credits using their earned income from the prior
  year.

Special Look-Back Rule for Determining Earned
Income Credit and Additional Child Tax Credit
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Special Look-Back Rule for Determining Earned
Income Credit and Additional Child Tax Credit

•  

• Example
• Betty was displaced on August 25, 2005, from
  Louisiana, Ninth Ward of New Orleans. In 2004,
  she had two qualifying children for EIC and
  Additional Child Tax Credit. Her earned income
  in 2004 was 16,250 and she filed as Head of
  Household (HOH).
• Bettys total income for 2005 was 10,000.
  Because her 2004 earned income is greater than
  her 2005 earned income, she may elect the greater
  income to figure EIC and Additional Child Tax
  Credit.

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Title IV, Section 407

•  

• Present Law
• Various Federal tax laws for deductions and
  credits.
• Change in Law
• Secretary may make adjustments in the application
  of the Federal tax law as may be necessary to
  ensure taxpayers do not lose deductions or
  credits.

Secretarial Authority to Make Adjustments
Regarding Taxpayer and Dependency Status
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Secretarial Authority to Make Adjustments
Regarding Taxpayer and Dependency Status
(continued)

• Section 407, allows the following authority for
  Hurricane Katrina displaced individuals
• Exclude from total household cost assistance
  received from government or charitable
  organizations.
• Disregard assistance received from government or
  charitable organization in determining whether
  more than one-half of an individuals support was
  provided.
• Treat students as being enrolled in school even
  if they are unable to attend classes.
• Double Benefits are not allowed.

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Additional Guidance

• Record Reconstruction
• Amended Returns
• Delinquent Returns
• Taxpayer Transcripts
• Documentation and Paperwork Issues

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Record Reconstruction - Income

• Form 4852 may be used prior to February 15 using
• Last pay stub,
• Estimate of income based on prior-year return
  data, or
• Taxpayers oral statement

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Prior Year Federal Tax Information

• Hurricane Katrina displaced individuals may call
  1-866-562-5227 to receive a transcript of their
  tax return 2004 income information via fax. They
  must stay on the line while the fax is being sent
  so they must be in the same location as the fax
  machine.
• For proper identification you will be required to
  give your name, filing status, social security
  number, address, and answer 2 random questions
  concerning your status.
• If you are not where the fax machine is located,
  a copy of your tax return can be mailed to your
  current address.

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Prior Year Federal Tax Information (continued)

• File Form 4506-T
• If individuals are unable to get a transcript by
  phone, they can file Form 4506-T, Request for
  Transcript of Tax Return, to get income
  information from the previous years tax return.
• They should write Hurricane Katrina in red
  letters across the top of the form to expedite
  processing.
• They should mail the form to the IRS address
  listed on the form for their area.
• The normal processing fee will be waived.

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Prior Year Federal Tax Information (continued)

• Or, individuals can file Form 4506, Request for
  Copy of Tax Return, for an actual copy of return
  filed, which includes copies of income statements
  such as the W-2.
• They should write Hurricane Katrina in red
  letters across the top of the form to expedite
  processing.
• They should mail the form to the IRS address
  listed on the form for their area.
• The normal processing fee will be waived.

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Completing Form 4852 with the same Employer

• Example 1
• Ted says he worked for XYZ Company in 2004, from
  February until December for a total of 11 months.
  Using the income statement from 2004 the listed
  wages were 18,000 for the 11 months he worked
  there. Ted states he worked for XYZ Company from
  January 2005 to August 26th, 2005 for a total of
  8 months. Assume wage rate was the same in 2005
  as 2004.
• To compute his estimated 2005 income from XYZ
  Company, take the 2004 monthly wages and multiply
  them by the number of months worked at XYZ
  Company in 2005.
• 18,000 11months 1,636 (to calculate 2004
  monthly wages)
• 1,636 x 8 months (Number worked in 2005)
  13,088 (est. 2005 wages)
• Enter 13,088 on Form 4852 line 7(A)a

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Completing Form 4852 with different Employers

• Example 2
• Esther said she worked for a new employer in
  2005. She worked for ABC Company from January
  3rd, 2005 through August 26th, 2005 for a total
  of 8 months. She says her hourly wage was 9.25
  and she worked an average of 40 hours per week.
• To compute her estimated 2005 wages, multiply
  the hourly wage by 40 to compute a weekly wage.
  Multiply that by 4.3 to compute a monthly wage.
• 9.25 x 40 hours 370.00 (estimated weekly
  wages)
• 370 x 4.3 1,591 (estimated monthly wages)
• 1,591 x 8 months 12,728 (estimated 2005
  wages)
• Enter 12,728 on Form 4852 line 7(A)a

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Form 4852, Federal Income Tax Withholding

• Example 3
• For Ted in example 1 annual wages of 13,088
  from XZY Company were computed. He tells you
  that he normally fills out Form W-4 with two
  withholding allowances even though his is single.
  To compute his Federal tax withheld multiply the
  number of withholding allowances by 3,200. Then
  reduce his annual wages from Form 4852 line 7(A)a
  by this amount. Use the resulting amount and
  Table 7 from Publication 15 (Circular E) to find
  his Federal tax withheld.
• 2 (withholding allowances) x 3,200 6,400
• 13,088 - 6,400 6,688
• 6,688 - 2,650 x 10 404 (using Table 7
  column a)
• Enter 404 on Form 4852 line 7(A)f

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Form 4852, Social Security and Medicare Taxes
Withheld

• Example 4
• In example 1, Teds annual wages of 13,088 from
  XZY Company were computed.
• To compute his Social Security Tax withheld
  multiply 13,088 by 6.2.
• 13,088 x 6.2 812
• Enter 812 on Form 4852 line 7(A)I
• To compute his Medicare Tax withheld multiply
  13,088 by 1.45.
• 13,088 x 1.45 190
• Enter 190 on Form 4852 line 7(A)j

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Help for Hurricane Displaced Individuals

• For More information on the Katrina Emergency Tax
  Relief Act of 2005 and Help for Hurricane
  Displaced Individuals
• Web Site http//www.irs.gov
• Toll Free Number 1-866-562-5227
• Disaster Referral Service Guide

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VRPP Outreach Information for 2005

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Title II, Section 201

•  

• Present Law
• Available to employers hiring individuals from
  targeted groups
• Change in Law
• Hurricane Katrina employee is treated as a member
  of a targeted group

Work Opportunity Tax Credit for Hurricane Katrina
Employees
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Title II, Section 202

•  

• Present Law
• No employer credit
• Change in Law
• 40 credit for qualified wages paid by an
  eligible employer to an eligible employee

Employer Retention Credit for Employers affected
by Hurricane Katrina
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VRPP Information Only (Out-of-Scope) for 2005

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Title IV, Section 402

•  

• Present Law
• Losses are deductible that exceed 100 and 10 of
  the taxpayers AGI.
• Change in Law
• Removes the two limitations for losses in
  Hurricane Katrina disaster area.

Suspension of Certain Limitations on Personal
Casualty Losses
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Casualty Losses

• Assistance Offered at IRS Taxpayer Assistance
  Centers
• Help Taxpayers determine the amounts of Casualty
  Loss
• Prepare original or amended tax returns to claim
  Casualty Losses
• Prepare Forms W-4 to adjust for the Casualty Loss
  
• Help Taxpayers obtain copies or transcripts of
  tax returns (without charge)
• Distribute Disaster Kits and additional resources
• Locations of the IRS Taxpayer Assistance Centers
  can be found at the IRS website
  www.irs.gov/localcontacts/index.html or by
  calling 1-866-562-5227

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Title IV, Section 405

•  

• Present Law
• Gain realized by an involuntary conversion is
  deferred to the extent similar property is
  purchased within two years.
• Change in Law
• Extends the replacement period from 2 years to 5
  years.

Extension of Replacement Period for
Nonrecognition of Gain
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Summary

• You should be able to
• Define and list the Individuals and Public
  Assistance Areas.
• Identify the deadlines for Hurricane Katrina
  impacted individuals for perform time-sensitive
  acts.
• Determine the VRPP tax law changes facilitated by
  four Titles of the Katrina Emergency Tax Relief
  Act (KETRA).
• Define who is eligible for the KETRA assistance
  using Form 13614K.
• Assist taxpayers in reconstructing their 2005
  source documents (W-2, 1099, etc.).
• Accurately apply the KETRA tax law using the
  appropriate forms and schedules.
• Identify KETRA outreach and out-of-scope subject
  matter.

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VRPP Forms Impacted by the KETRA (Appendix of
Forms)

• Form 13614K, Volunteer Return Preparation Program
  Hurricane Katrina Intake/Interview Sheet
• Form 8914, Exemption Amount for Taxpayers Housing
  Individuals Displaced by Hurricane Katrina
• Form 8915, Qualified Hurricane Katrina Retirement
  Plan Distributions Repayments
• Form 1040 Series, U.S. Individual Income Tax
  Return (Including 1040 NR)
• Schedule A, Itemized Deductions
• Schedule EIC, Earned Income Credit
• Form 8812, Additional Child Tax Credit
• Form 8606, Nondeductible IRAs
• Form 4852, Substitute for Form W-2 (Wage and Tax
  Statement)
• Form 4506, Request Copy of Tax Return
• Form 4506-T, Request for Transcript of Tax Return
• Earned Income Credit Worksheet
• Child Tax Credit Worksheet

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Outreach Forms Impacted by the KETRA (Appendix
of Forms)

• Form 5884, Work Opportunity Credit
• Form 5884-A, Hurricane Katrina Employee Retention
  Credit
• Form 3800, General Business Credit

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Out-of-Scope Forms Impacted by the KETRA
(Appendix of Forms)

• Form 4684, Casualties Thefts