The House and Senate reached agreement and passed the final measure on the Katrina Emergency Tax Relief Act (H.R. 3768) on September 21, 2005, and President Bush signed it into law on September 23.

Some of the provisions in the final Katrina Emergency Tax Relief Act (“KETRA”) are:

• Encourages Cash Donations by Individuals

Under current law, individuals may deduct charitable donations up to 50% of their adjusted gross incomes.  Deductions for charitable deductions are further limited by the phase-out of itemized deductions.  Under KETRA, cash donations to charities are exempt from both the 50% income limitation and the phase-out of itemized deductions if the donations are made before January, 2006.

• Encourages Cash Donations by Corporations

Under current law, corporations may deduct charitable donations up to 50% of their taxable incomes.  Under KETRA, cash donations to charities are exempt from the 10% taxable income limitation if the donations are made before January, 2006.

• Provides Tax Relief for Housing Assistance to Dislocated Persons

KETRA creates a special tax deduction for individuals who provide rent-free housing to dislocated persons for at least sixty days.  The deduction is $500 for each dislocated person housed in the individual’s principal residence, up to a maximum deduction of $2,000.  The deduction may be claimed in either 2005 or 2006, but cannot be claimed in both years with respect to the same dislocated person.

• 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 situations could affect their eligibility for various tax benefits.  KETRA allows affected individuals the option of using their 2004 incomes to calculate the Child Credit and the Earned Income Credit on their 2005 tax returns.  KETRA also grants the U.S. Treasury Department the authority to ensure that affected taxpayers do not lose benefits or experience a change in filing status in 2005 or 2006 due to temporary relocations.

• Allows Full Deductibility of Personal Casualty Losses

Under current law, individuals who itemize their deductions may deduct personal casualty losses to the extent the losses exceed 10% of adjusted gross income and a $100 floor.  KETRA waives the 10% adjusted gross income threshold and the $100 floor, thus allowing individuals to deduct their losses in full.

• Modifies Tax Treatment When Using a Personal Vehicle for Charitable Work

Under current law, individuals may claim a tax deduction for the costs associated with using a personal vehicle for charitable work.  The deduction is calculated by using a mileage reimbursement of 14 cents per mile.  The reimbursement rate for business use is set periodically through IRS guidance and currently stands at 48.5 cents per mile.  KETRA sets the mileage reimbursement rate for charitable work at 70% of the standard business mileage rate, which would be 33.95 cents per mile.  If the taxpayer is a volunteer and is reimbursed for the use of the personal vehicle, KETRA also ensures that the taxpayer does not have to pay income tax on the reimbursement.  These provisions are effective through December 31, 2006.

• Encourages Charitable Donations of Food Inventory

Under current law, C Corporations may deduct the cost of food inventory donations.  The value of the deduction is equal to the lesser of two times the basis or basis plus one-half of added value.  KETRA extends the current law deduction for food donations to S Corporations, Partnerships and Sole Proprietors through the end of the 2005 calendar year. 

• Encourages Donations of Educational Books to Public Schools

KETRA allows a charitable donation through the end of the 2005 calendar year for donations of educational books to public schools.  The value of the deduction is equal to the lesser of two times the basis or basis plus one-half of the added value.