Gulf Opportunity Zone Act

GULF OPPORTUNITY ZONE ACT
On December 21, 2005, President Bush signed into law the “Gulf Opportunity Zone Act of 2005” (Pub. L. No. 109-135), which expands on the Katrina Emergency Relief Act of 2005 (KETRA; Pub. L. No. 109-73) and includes several provisions of interest to payroll professionals.

Employer-provided housing:
The Act provides a temporary income exclusion of up to $600 for the value of in-kind lodging provided for a month to a qualified employee (and the employee’s spouse or dependents) by or on behalf of a qualified employer. The exclusion does not apply for purposes of social security, Medicare, or FUTA taxes. It applies to lodging provided between January 1, 2006, and June 30, 2006.

A “qualified employee” is an individual who: (1) on August 28, 2005, had a principal residence in the Gulf Opportunity (GO) Zone (i.e., that portion of the Katrina Disaster Area determined by the President to warrant individual or public assistance from the federal government by reason of Hurricane Katrina): and (2) performs substantially all of his or her employment services in the GO Zone for the qualified employer furnishing the lodging. A “qualified employer” is an employer with a trade or business in the GO Zone.

Withdrawals from retirement plans:
Effective on the date of enactment, the Act expands the relief provided under KETRA in the case of qualified Hurricane Katrina distributions to any “qualified hurricane distribution,” which is now defined to include distributions relating to Hurricanes Rita and Wilma. Note: the total amount of qualified hurricane distributions that an individual can receive from all plans, annuities, or IRAs is $100,000.

Under the provision, a qualified hurricane distribution includes qualified Hurricane Katrina distributions under KETRA as well as any other distribution from an eligible retirement plan: made on or after September 23, 2005, and before January 1, 2007, to an individual whose principal place of abode on September 23, 2005, is located in the Hurricane Rita disaster area and who has sustained an economic loss by reason of Hurricane Rita; or made on or after October 23, 2005, and before January 1, 2007, to an individual whose principal place of abode on October 23, 2005, is located in the Hurricane Wilma disaster area and who has sustained an economic loss by reason of Hurricane Wilma.

Recontributions of withdrawals from retirement plans:
Effective on the date of enactment, the Act expands the relief provided under KETRA to allow recontribution of hardship distributions from a 401(k) plan, a 403(b) annuity, or an IRA (i.e., distributions intended to be used to purchase or build a principal residence in the hurricane disaster area that are not used for this purpose on account of the hurricane) with respect to qualified Hurricane Rita distributions (received after February 28, 2005, and before September 24, 2005) and qualified Hurricane Wilma distributions (received after February 28, 2005, and before October 24, 2005). Under the provision: any portion of a qualified Hurricane Rita distribution may, during the period beginning on September 23, 2005, and ending on February 28, 2006, be recontributed to a plan, annuity or IRA to which a rollover is permitted; and any portion of a qualified Hurricane Wilma distribution may, during the period beginning on October 23, 2005, and ending on February 28, 2006, be recontributed to a plan, annuity, or IRA to which a rollover is permitted. A qualified Hurricane Rita distribution is a hardship distribution received after February 28, 2005, and before September 24, 2005.

Loans from retirement plans:
Effective on the date of enactment, the Act expands the relief provided under KETRA in the form of special rules for loans from qualified employer plans to loans to qualified Hurricane Rita and Hurricane Wilma individuals made on or after the date of enactment and before January 1, 2007. Note: An individual cannot be a qualified individual with respect to more than one hurricane.

Under the provision:
if any repayment of a loan made to a qualified Hurricane Rita individual (see “Withdrawals from retirement plans,” above) of an outstanding loan is due on or after September 23, 2005, through December 31, 2006, the due date is delayed for one year. If any repayment of a loan made to a qualified Hurricane Wilma individual (see “Withdrawals from retirement plans,” above) of an outstanding loan is due on or after October 23, 2005, through December 31, 2006, the due date is delayed for one year.

Suspension of time limits:
The Act codifies previous guidance authorizing the suspension of time limits for taxpayers determined to be affected by the Presidentially declared disaster relating to Hurricanes Katrina, Rita, and Wilma in connection with “required acts” – e.g., filing tax returns, paying taxes, or filing tax credit or refund claims – through February 28, 2006.

Look-back rule for determining Earned Income Tax Credit:
The Act expands the rule governing “Katrina elections” under KETRA to permit qualified individuals affected by Hurricanes Rita and Wilma to make similar elections. The reference dates are September 23, 2005, for Rita and October 23, 2005, for Wilma – rather than August 25, 2005.

The Act permits qualified individuals to elect to calculate their Earned Income Tax Credit (EITC) and child credit for the taxable year that includes the appropriate reference date using their earned income from the prior taxable year. Qualified individuals are permitted to make the election only if their earned income for the taxable year that includes the reference date is less than their earned income for the preceding taxable year. “Qualified individuals” are: individuals who on the reference date had their principal place of abode in the GO Zone, or

individuals who on the reference date were not in the GO Zone but lived in a hurricane disaster area and were displaced from their homes.

Election to treat combat pay as earned income for EITC purposes
Nontaxable compensation (e.g., combat pay up to certain limits) is not included in earned income for purposes of computing the EITC. Under the Act, however, an individual may elect to treat combat pay otherwise excluded from gross income as earned income for EITC purposes through December 31, 2006. This extends the current rule for one year.

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