Jacob M. Leon, CPA/PFS CFP^®

IRS has issued temporary and proposed regs explaining the limited exemption available for 2005 and 2006 for taxpayers who house victims of Hurricane Katrina. The limited exemption (referred to as a “reduction in taxable income” by the temp regs) was created by KETRA (the Katrina Emergency Tax Relief Act of 2005).

Background. For tax years beginning in 2005 and 2006, there's an additional exemption of $500 for each Hurricane Katrina displaced individual of the taxpayer, up to a $2,000 cap for both years. A displaced individual is one: (1) whose principal place of abode on August 28, 2005 was in the Hurricane Katrina disaster area; (2) who was displaced from the abode and if the abode was not in the core Katrina disaster area but in the Katrina disaster area, the abode was damaged by Hurricane Katrina or the person was evacuated from the abode because of that hurricane; and (3) who was provided housing free of charge by the taxpayer in his principal residence for a period of 60 consecutive days ending in the tax year in which the exemption is claimed. For purposes of the additional exemption, the Hurricane Katrina disaster area is comprised of the states of Alabama, Florida, Louisiana, and Mississippi. The Hurricane Katrina core disaster area is the same as the Gulf Opportunity Zone (GO Zone)

A taxpayer's spouse or dependent can't be a displaced individual with respect to the taxpayer. The exemption is denied if the taxpayer received any rent or other amount from any source for providing housing for a displaced individual. The exemption is not subject to the income-based phaseouts applicable to other personal exemptions, and is allowed in computing AMT.

Guidance in the new regs. The new regs provide the following guidance on who is eligible for the limited exemption for housing Katrina victims, and how much can be claimed:

• A taxpayer can't claim the special exemption unless he includes on his return the taxpayer identification number of the Hurricane Katrina displaced individual. (Reg. § 1.9300-1T(a))

• A taxpayer is treated as providing housing if the housing is provided either in, or on the site of, his principal residence (defined the same way as it is for purposes of the Code Sec. 121 home-sale exclusion). In addition, the taxpayer must be an owner or lessee of the residence to be treated as providing housing to a Hurricane Katrina displaced individual.

• For purposes of the rule denying the exemption if the taxpayer received any rent or other amount from any source for providing housing for a displaced individual, amounts in connection with providing housing include rent and utilities, but do not include amounts for telephone calls, food, clothing and transportation.

• The $2,000 aggregate limit on the limited exemption applies to unmarried individuals and married taxpayers filing a joint tax return. Married taxpayers who file separate returns may reduce taxable income by $1,000 each for all tax years.

• A taxpayer may reduce taxable income with respect to a specific Hurricane Katrina displaced individual in 2005 or 2006, but not both years. Additionally, a Hurricane Katrina displaced individual may be taken into account by only one taxpayer occupying the same principal residence.

Observation: The temp regs essentially restate the guidance carried in the instructions to Form 8914 (Exemption Amount for Taxpayers Housing Hurricane Katrina Victims) issued in January of this year

Effective date. The temp regs apply to tax years beginning after December 31, 2004, and before January 1, 2007, and ending on or after December 11, 2006. Taxpayers may rely on the temp regs with respect to tax years ending December 11, 2006, but can't rely on the absence of regs for tax years ending before the filing date for a result contrary to that under the temp regs.

For more information on how these provisions may affect your tax situation

call me at 713-333-7477

or email me at jacob@thefinancialfirm.com

 

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Posted 12/14/06