• Hurricane Katrina Speeds Temporary Tax Relief
  • January 4, 2006 | Author: J. Eric Taylor
  • Law Firm: Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis Professional Association - Tampa Office
  • Individual taxpayers have until the end of this calendar year to make charitable contributions and take advantage of special tax benefits under the Katrina Emergency Tax Relief Act of 2005.

    The deductibility of charitable contributions normally is limited to a percentage of the donor's "contribution base," which generally approximates the donor's adjusted gross income for federal income tax purposes. Gifts of cash generally are deductible to the extent of 50% of the donor's contribution base, while gifts of property generally are subject to a 30% deductibility ceiling. Where these ceilings are exceeded in a specific year, an individual may carry over excess deductions for up to five years.

    In addition, donors who itemize their income tax deductions may have itemized deductions arising from charitable contributions reduced if the donor's adjusted gross income exceeds certain thresholds. For 2005, this threshold is $145,950.

    Under the Katrina Emergency Tax Relief Act of 2005, these limitations are suspended with respect to cash contributions made to certain charities after August 27, 2005, and on or before December 31, 2005. It is not necessary that individual donors demonstrate that the charitable contribution is for hurricane relief efforts. Other rules apply, however.

    First, in order to take advantage of these special rules, an individual must make an election to do so. Second, the contribution must be in the form of cash, not property. Third, the cash contribution must be made to a public charity - contributions to private foundations, charitable remainder trusts, charitable lead trusts, donor-advised funds, or so-called "supporting organizations" do not qualify under these special rules.

    The decision as to whether to make an election under these special provisions requires a careful review of an individual tax situation. For example, in some situations it is possible that remaining subject to the 50% deductibility ceiling and allowing excess deductions to be carried over to future years would ultimately prove more tax-efficient. Therefore, it is very important that donors consult their tax advisors as soon as possible in order to determine whether to take advantage of these special rules prior to the end of the calendar year.