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How to treat Katrina-related issues when completing California tax returns

Katrina Tax Relief Act - California has not conformed to any of the federal law changes made under the Katrina Emergency Tax Relief Act (KETRA) of 2005. However, California will follow federal policy by allowing special tax relief for California taxpayers affected by Hurricane Katrina in the federally declared disaster areas for the items listed below:

  • Extended due dates for filing tax returns and paying taxes. The Franchise Tax Board extended the dates to file tax returns and pay taxes for taxpayers affected by Hurricane Katrina. This follows federal policy, which extended the due date to February 28, 2006 for taxpayers who had an original or extended due date falling on or after August 29, 2005. For more information, see IR-2005-112, September 28, 2005.

    Revised extended due date. The Franchise Tax Board will follow IRS notice IR-2006-30, February 17, 2006, which postpones the extended due date to file tax returns and pay taxes for taxpayers affected by Hurricane Katrina from February 28, 2006 to August 28, 2006. Taxpayers in the most severely damaged parishes and counties of Louisiana and Mississippi automatically have through August 28, 2006 to file returns and make certain tax payments that had a due date or extended due date on or after August 29, 2005, and on or before August 28, 2006.

    The automatic extension applies to taxpayers in the following Louisiana parishes: Cameron, Jefferson, Orleans, Plaquemines, St. Bernard, St. Charles, and St. Tammany. The extension also applies automatically to taxpayers in the following Mississippi counties: Hancock, Harrison, and Jackson.

    Taxpayers outside of the above areas who suffered severe hurricane damage are also entitled to the extra time if they identify themselves as being impacted. To request an extension, write “Hurricane Katrina” in red ink at the top of the tax return. If taxpayers are e-filing, follow the software instructions for disaster information.

  • Donations of approved employee leave time program. Under the employee leave time program, employees can, with the approval of their employers, elect to forgo their vacation, sick or personal leave in exchange for the employer making cash payments to a qualified tax-exempt organization providing relief for victims of Hurricane Katrina. The cash value of the donated time will not affect the employee's income, and employees may not claim a charitable contribution deduction for any donated leave. Employers will be able to deduct the amount of their cash payments. For additional information, see IRS Notice 2005-68 and the "Help for Hurricane Victims" at www.irs.gov.

  • Hardship loans and distributions for qualified individuals from qualified retirement plans used for a need arising from Hurricane Katrina. California will follow the relief provisions stated in IRS Announcement 2005-70. If a distribution is made from a qualified retirement plan, IRS Announcement 2005-70 provides that the distribution will not disqualify the plan. Relief is also granted from certain verification procedures that may be required under retirement plans with respect to hardship loans and distributions. For more information regarding the type of retirement plans and individuals that qualify for the relief, see IRS Announcement 2005-70.

The Katrina Emergency Tax Relief Act (KETRA) of 2005 provided additional relief provisions at the federal level. California has not, as yet, conformed to those provisions. When reporting California taxable income, an adjustment will be required to include income or remove deduction items allowed by KETRA from California taxable income. See the list below for specific provisions:

ISSUE: RETIREMENT PLAN DISTRIBUTIONS OR LOANS FEDERAL TREATMENT CALIFORNIA TREATMENT

Early withdrawal penalty relief

The 10% additional tax on early distributions does not apply to the Katrina victims for up to $100,000 withdrawn from retirement plans, annuities, or IRAs.

The distribution must be made on or after August 25, 2005, and before January 1, 2007, from an eligible retirement plan such as a qualified plan or an IRA, to an eligible individual – one whose principal residence was in the Hurricane Katrina disaster area on August 28, 2005, and who sustained an economic loss from Hurricane Katrina.

California does not conform.

The 2.5% additional tax applies to early distributions from retirement plans, annuities, and IRAs.

Use form FTB 3805P, part 1, to make calculation of additional tax.

Rollover period extended

Generally, taxpayers who repay the distribution within three years will qualify for rollover treatment. If they cannot repay the distribution back within three years, they will be taxed on their distribution. See below for more information.

California does not conform.

Use Schedule CA (540/540NR), line 15, column C to make the adjustment.

Income allowed to be spread over three years

Taxpayers who cannot repay the distributions within the three-year time period can spread the income evenly over three years. Taxpayers can elect out of this special treatment and pay tax on the entire amount of the distribution in the year of the distribution.

California does not conform.

Use Schedule CA(540/540NR), line 15, column C to make the adjustment.

Increased limits for qualified plan loans & extension of loan payment dates

For loans made on or after September 23, 2005, and before January 1, 2007, taxpayers may borrow up to $100,000. For loans made prior to those dates the limit was $50,000.

Extension of loan payment dates

If the taxpayer has a qualified loan balance on or after August 25, 2005, then they will have their payment due date extended one year if their required payment due date falls between August 25, 2005, and December 31, 2006.

The repayment schedule will be adjusted for the one-year extension for the five-year and level-payment requirements.

California does not conform.

There is no tax impact.

Recontributions of withdrawals for home purchases canceled due to Hurricane Katrina

Any individual who received a qualified retirement distribution may, during the period between August 25, 2005, and February 28, 2006, make one or more contributions to an eligible retirement plan.

The taxpayer is allowed to recontribute their distribution because it was not used to purchase or construct a principal residence in the Hurricane Katrina disaster area.

California does not conform.

No adjustment needed since CA taxed the distribution upon withdrawal. This is treated as a rollover for Federal.

ISSUE: INVOLUNTARY CONVERSION REPLACEMENT PERIOD FEDERAL TREATMENT CALIFORNIA TREATMENT

Individuals and corporations

Individuals: Normally, a taxpayer whose principal residence is located in a Presidentially declared disaster area has four years to replace their residence if there was an involuntary conversion.

For those principal residences damaged by Katrina, the replacement period was extended to five years.

Corporations: Normally, businesses must invest in replacement property within two years after the involuntary conversion.

For business property located in the Katrina disaster area, this two-year replacement period has been extended to five years.

California does not conform.

Individuals: Use Schedule CA(540/540NR), line 21, column C to make the adjustment.

Corporations: Use Schedule D-1 to report the gain.


ISSUE: CHARITABLE CONTRIBUTIONS AND DONATIONS & ACTIONS FEDERAL TREATMENT CALIFORNIA TREATMENT

Individuals – Charitable contributions

Generally, the taxpayer’s deduction for cash charitable donations made to qualified charitable organizations is 50% of their AGI with the excess of the donation carried over for five years.

For any cash donation made from August 28, 2005, to December 31, 2005, the 50% limitation was removed. Donations made prior to this time period are still subject to the normal limitations and carryover period.

AGI Phase-out: These donations are also exempt from the application of the itemized deduction phase-out for high-AGI taxpayers.

California does not conform.

Use Schedule CA(540/540NR), line 41 to make the adjustment.

Corporations – Charitable contributions

For C Corporations, the 10% limitation does not apply to cash contributions made for Hurricane Katrina.

California does not conform.

Make the adjustment on page 1 of Forms 100, 100W, or 100S under State Adjustments.

Individuals - Mileage reimbursement

Generally, the mileage rate deduction for using your personal vehicle for any charity work is 14 cents per mile. If the taxpayer used their personal vehicle for charity work related to Katrina, between August 25, 2005, to December 31, 2006, the mileage rate was increased to 70 percent of the business standard mileage rate.

California does not conform.

Use Schedule CA(540/540NR), line 41 to make the adjustment.

Mileage reimbursements to charitable volunteers excluded from gross income

Qualified amounts received by Hurricane Katrina volunteers for mileage reimbursement from August 25, 2005, to December 31, 2006, shall be excluded from income. No deduction or credit shall be allowed with respect to the mileage expenses excluded from gross income.

California does not conform.

Use Schedule CA(540/540NR), line 41 to make the adjustment.

Food donations

Under the Katrina legislation, taxpayers may claim a deduction for the donation of food inventory donated to an organization described in IRC Section 501(c)(3) made from between August 28, 2005, and December 31, 2005. The deduction cannot exceed 10% of the taxpayer’s net income for the taxable year from all trades or businesses.

Caution: The 10% limitation does not apply to C Corporations.

California does not conform.

Use Schedule CA(540/540NR), line 41 to make the adjustment.

Book inventory donations Applies to C Corporations

C Corporations are allowed an enhanced deduction for contributions of book inventories, for donations made from August 28, 2005, to December 31, 2005.

California does not conform.

Make the adjustment on page 1 of Forms 100, 100W or 100S under State Adjustments.


ISSUE: DEDUCTION FEDERAL TREATMENT CALIFORNIA TREATMENT

Casualty loss deduction

Generally, casualty losses are deductible if they exceed:

  1. 10% of the taxpayer’s AGI and
  2. A $100 floor.

Casualty losses that:

  1. Were caused by Hurricane Katrina and
  2. Happened in the Hurricane Katrina disaster area on or after August 25, 2005

are not subject to the regular casualty loss limitations.

California does not conform.

Individuals: Use Schedule CA(540/540NR), line 41 to make the adjustment.

Discharge of nonbusiness indebtedness

Generally, the income for the discharge of indebtedness is taxable.

The income from the discharge will not be considered taxable if these requirements are all met:

  • The taxpayer’s home was located in the:
    • Core disaster area, OR
    • Hurricane Katrina disaster area, but outside the core, and the taxpayer suffered an economic loss.
  • The discharges of nonbusiness indebtedness occurred between August 25, 2005, and December 31, 2006.

California does not conform.

Use Schedule CA(540/540NR), line 21, column C to make the adjustment.


ISSUE: EXEMPTION FEDERAL TREATMENT CALIFORNIA TREATMENT

New limited exemption for housing Katrina victims

A taxpayer may claim a $500 deduction from their taxable income for each Hurricane Katrina displaced person that they house in their home. The taxpayer doesn’t need to itemize their deductions to take advantage of the $500 deduction.

The following requirements must be met to qualify for the deduction:

  • The home must be the taxpayer’s principle place of residence (homeowner or renter).
  • The displaced person lived in the taxpayer’s home for 60 consecutive days.
  • The displaced person was not charged to live in the taxpayer’s home.
  • The displaced person’s principle place of abode was in the Hurricane Katrina disaster area as of August 25, 2005.
  • The displaced person is not the spouse or any dependent of the taxpayer.

The deduction is allowed for up to 4 displaced persons ($2,000) and is not subject to deduction limitations for high-income AGI taxpayers.

The exemption amount is allowed in computing the federal alternative minimum tax (AMT).

California does not conform.

Make no adjustment since CA starts with Fed AGI. Taxpayers cannot claim an exemption for any individuals housed due to Katrina.



EXTENSIONS TO PAY AND FILE RETURN

FEDERAL TREATMENT CALIFORNIA TREATMENT

Certain counties in Alabama, Louisiana, and Mississippi have been declared a federal disaster area due to the Hurricane Katrina. This allows disaster victims to receive an extension to file tax returns and submit tax payments.

Affected taxpayers include:

  • Individuals and businesses located in the disaster area
  • Taxpayers whose records are located in the disaster area.
Taxpayers will have until February 28, 2006, to file tax returns and submit tax payments for any tax return or payment that became due on or after the date the hurricane struck.

We will follow the federal treatment.

The Franchise Tax Board will cancel interest and any late filing or late payment penalties that would otherwise apply.



CLAIMING THE DISASTER LOSS

FEDERAL TREATMENT CALIFORNIA TREATMENT

Certain counties in Alabama, Louisiana, and Mississippi have been declared a federal disaster area due to Hurricane Katrina. Taxpayers can claim the loss in the tax year in which the disaster occurred or in the tax year before the disaster occurred.

We will follow the federal treatment.

Individuals: See Publication 1034, Disaster Loss Publication, or form FTB 3805V, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Individuals.

Corporations: See form FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Corporations.