The Katrina Emergency Tax Relief Act (Katrina Act) increases substantially the maximum amount a federal income taxpayer may deduct in 2005 with respect to cash charitable contributions made between August 28 and December 31, 2005.

The Benefit

Ordinarily, the amount of a taxpayer's charitable deduction for cash gifts in any year is limited to 50% of the taxpayer's adjusted gross income. In addition, a taxpayer's itemized deductions ordinarily are reduced by 3% of the amount by which the taxpayer's adjusted gross income exceeds $145,950. However, for charitable contributions made under the Katrina Act, the 50% limit is increased to 100% and the 3% reduction is removed.

To take advantage of the Katrina Act, charitable contributions must be made to qualified public charities (not donor-advised funds, supporting organizations or private, non-operating foundations). However, the charity need not be engaged in Katrina relief efforts.

Timing

Contributions made by check and mailed on or before December 31 are considered made in 2005, even if the check is not cashed until 2006. Credit card contributions posted to the taxpayer's account by December 31 are considered made in 2005, even if the taxpayer does not pay the resulting charge until 2006.

Additional Considerations

A taxpayer over age 59½ may utilize the Katrina Act to make charitable contributions using withdrawals from his or her IRA or other retirement accounts. Although the amount withdrawn will be included in gross income for 2005, the corresponding charitable deduction will fully offset the additional income. However, because the withdrawal from the retirement account increases the taxpayer's adjusted gross income, certain exemptions and other itemized deductions (subject to the 3% rule) may be reduced for higher-income taxpayers. In addition, for state income tax purposes, funds withdrawn from such retirement accounts may create additional gross income without generating a corresponding charitable deduction.

Finally, if a taxpayer is subject to the federal alternative minimum tax (AMT) in 2005, but is unlikely to be subject to it next year, he or she may well be better off deferring charitable contributions until 2006, despite the fact that the tax relief offered under the Katrina Act will be in effect only during 2005.

For more information on this matter or for assistance with year-end and new year tax planning, contact the author listed above.