Besides removing some of the penalties for early withdrawal of funds from retirement plans, victims of Katrina would be allowed to exclude from gross income otherwise taxable IRA account withdrawals for a charitable contribution; it raises the permitted individual limit for cash contributions from 50% to 60% for donations made this year; and gives the IRS commissioner permission to extend deadlines for filing tax returns and paying income, estate and gift taxes. Under the latter provision, employment and excise taxes are specifically excluded.
Regarding withdrawals from retirement plans, the proposal would waive the 10% penalty tax for premature distributions from IRAs and qualified retirement plans (including defined benefit plans, 401(k) plans and 403(b) plans) for individuals.
Individuals eligible for this waiver because of Katrina would be permitted to pay income tax on such distributions over a three-year period, according to a section of the legislation distributed by the Senate Finance Committee. Amounts distributed could be re-contributed to a qualified retirement plan over the three-year period following the distribution date and receive rollover treatment.
Distributions for home purchases, which were not finalized because of Hurricane Katrina, also could be re-contributed to a qualified retirement plan or IRA.
The charitable rollover provision would exclude from gross income otherwise taxable Individual Retirement Account (IRA) withdrawals from a traditional or a Roth IRA for qualified charitable distributions. Under the provision, taxpayers who are 70 1/2 and older would be allowed to roll over amounts from their IRA accounts directly to a qualified charitable organization on a tax-free basis. In addition, the provision allows taxpayers aged 59 1/2 and older to transfer IRA funds to a charitable remainder trust and give a remainder interest in the trust to charity without tax consequences.
Regarding the taxes-due provision, Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont., who introduced the Senate version of the bill, said that the IRS already had issued a notice for victims of Katrina extending the time period until Jan. 3, 2006, to file any returns, pay any taxes or make any deposits due.
"Although this is intended to apply to employment and excise taxes, it is unclear that the IRS has the authority to do so," they explained. "This proposal extends the deadlines until Feb. 28, 2006, and clarifies that the extension includes employment and excise taxes in addition to income, estate and gift taxes," they said in a statement. Penalties and interest that would otherwise apply are waived, they added.
