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Financial Planning > Tax Planning > Tax Deductions

Lawmakers Delete Katrina IRA Rollover Provision

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The final Hurricane Katrina relief bill that President Bush signed Friday left out a provision included in earlier drafts that would have allowed direct, tax-free rollovers of individual retirement account assets to charity.[@@]

However, another provision of the new Katrina Emergency Tax Relief Act of 2005 might provide indirect help for taxpayers who want to arrange charitable rollovers, according to John Fenton and Sonya King, tax law experts at Tax Facts, one of National Underwriter’s sister publications.

KETRA temporarily suspends the 50% limit on cash contributions for contributions made to qualified Katrina relief efforts.

In addition, a deduction for qualified Katrina relief contributions will not be treated as an itemized deduction for purposes of calculating the overall limit on itemized deductions.

Fenton and King say KETRA contains another provision that could be helpful to companies seeking to support Katrina survivors: Employers adopting leave-based donation programs to aid the victims can allow employees to donate their vacation, sick, or personal leave in exchange for employer cash payments to qualified Katrina relief efforts.

The Internal Revenue Service says that employees do not have to include the donated leave in their income and that employers will be permitted to deduct the amount of the cash payment.

KETRA offers Katrina survivors several avenues for tapping IRAs.

Residents of the disaster areas can, for example, withdraw up to $100,000 in IRA or other retirement plan assets between Aug. 2005, and Dec. 31, 2006, without paying the usual 10% tax on early distributions, Fenton and King say.

KETRA also will increase the limit on loans from a qualified employer plan for individuals affected by Hurricane Katrina.

KETRA lets survivors borrow the entire value of their vested balance up to $100,000, rather than the usual limit of one-half of the value up to $50,000.

Fenton and King say the due dates for repayment of both new and existing plan loans will be extended for survivors. Any loan repayment due between Aug. 29, 2005, and Dec. 31, 2006, may be delayed 1 year. In addition, the time period from Aug. 29, 2005, and Dec. 31, 2006, will not count in calculating the statutory 5-year loan repayment period.


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