Katrina Emergency Tax Relief Act of 2005
CHARITABLE CONTRIBUTION PROVISIONS

In September 2005, Congress passed the Katrina Emergency Tax Relief Act of 2005 (the “Act”). This Legal Update reports on one of the Act's most important provisions, which provides temporary tax benefits to anyone making a contribution to a qualified charity between August 28 and December 31, 2005 ("Effective Period").

Individuals.  Under normal circumstances, the Internal Revenue Code ("Code") limits the ability of individuals to deduct charitable contributions.  Individuals may deduct charitable donations of cash up to 50 percent of their annual adjusted gross income.  The Code also further limits deductions for charitable gifts due to a phase-out of itemized deductions above certain income levels.

Under the Act, cash donations made by individuals to most charities during the Effective Period are exempt from the 50 percent income limitation and the phase-out of itemized deductions if the individual makes an election have the Act apply. Nonetheless, the Act provides that an individual’s total charitable deductions for the year cannot exceed 100 percent of his or her adjusted gross income.

Corporations.  Generally, the Code limits the annual charitable deduction available to corporations to 10 percent of taxable income.  During the Effective Period, however, cash donations by corporations to most charities for relief efforts related to Hurricane Katrina are exempt from the 10 percent taxable income limitation. The corporation must make an election in order to qualify for the benefits of the Act. 

The Act does not apply to contributions to organizations described in Code § 509(a)(3) or to contributions to certain donor-advised funds. 

The Act gives taxpayers a special opportunity to obtain a greater charitable deduction for gifts to certain organizations before the end of 2005. 

If you have any questions about this article or need more information about the Act, please do not hesitate to contact a member of our Taxation & Estate Preservation Group.

Consistent with Internal Revenue Service Circular 230, we advise you that this legal update has not been written as a formal opinion of counsel. Accordingly, IRS regulations require us to advise you that any tax information contained herein was not intended or written to be used and cannot be used for the purpose of avoiding federal tax penalties.