Publication 590 (2005), Individual Retirement Arrangements (IRAs)

4. Hurricane-Related Relief

Table of Contents

What's New for 2005

Hurricane Tax Relief. Special rules apply to the use of retirement funds (including IRAs) by individuals who suffered an economic loss as a result of Hurricane Katrina, Rita, or Wilma.

Introduction

Special rules apply to withdrawals, repayments, and loans from certain retirement plans (including IRAs) for taxpayers who suffered an economic loss as a result of Hurricane Katrina, Rita, or Wilma.

If you receive a qualified hurricane distribution (defined later), it is taxable, but is not subject to the 10% additional tax on early distributions. The taxable amount is figured in the same manner as other IRA distributions. However, the distribution is included in income ratably over 3 years unless you elect to report the entire amount in the year of distribution. You can repay the distribution and not be taxed on the distribution. See Qualified Hurricane Distributions, later.

If you received a distribution from an IRA to buy, build, or rebuild a first home but did not buy, build, or rebuild the home because of Hurricane Katrina, Rita, or Wilma, you may be able to repay the distribution and not pay income tax or the 10% additional tax on early distributions. See Repayment of a Qualified Distribution for the Purchase or Construction of a Main Home.

Form 8915, Qualified Hurricane Retirement Plan Distributions and Repayments, is used to report qualified hurricane distributions and repayments. Also report qualified distributions for home purchases and construction that were cancelled because of Hurricane Katrina, Rita, or Wilma on Form 8915.

For information on other tax provisions related to these hurricanes, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma.

Qualified Hurricane Distributions

If you receive a qualified hurricane distribution, you must include it in your income in equal amounts over 3 years. For example, if you received a $60,000 qualified hurricane distribution in 2005, you would include $20,000 in your income in 2005, 2006, and 2007. However, you can elect to include the entire distribution in your income in the year it was received.

A qualified hurricane distribution is any distribution you received from an eligible retirement plan (including IRAs) if all of the following conditions apply.

The distribution was made:
1. After August 24, 2005, and before January 1, 2007, for Hurricane Katrina.
2. After September 22, 2005, and before January 1, 2007, for Hurricane Rita.
3. After October 22, 2005, and before January 1, 2007, for Hurricane Wilma.
Your main home was located in a qualified hurricane disaster area listed below on the date shown for that area.
1. August 28, 2005, for the Hurricane Katrina disaster area. For this purpose, the Hurricane Katrina disaster area includes the states of Alabama, Florida, Louisiana, and Mississippi.
2. September 23, 2005, for the Hurricane Rita disaster area. For this purpose, the Hurricane Rita disaster area includes the states of Louisiana and Texas.
3. October 23, 2005, for the Hurricane Wilma disaster area. For this purpose, the Hurricane Wilma disaster area includes the state of Florida.
You sustained an economic loss because of Hurricane Katrina, Rita, or Wilma and your main home was in that hurricane disaster area on the date shown in item (2) for that hurricane. Examples of an economic loss include, but are not limited to (a) loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause; (b) loss related to displacement from your home; or (c) loss of livelihood due to temporary or permanent layoffs.

If you meet all these conditions, you can generally designate any distribution (including periodic payments and required minimum distributions) from an eligible retirement plan as a qualified hurricane distribution, regardless of whether the distribution was made on account of Hurricane Katrina, Rita, or Wilma. Qualified hurricane distributions are permitted without regard to your need or the actual amount of your economic loss.

Distribution limit. The total of your qualified hurricane distributions from all plans is limited to $100,000. If you have distributions in excess of $100,000 from more than one type of plan, such as a 401(k) plan and an IRA, you may allocate the $100,000 limit among the plans, any way you choose.

Example.

In 2005, you received a distribution of $50,000. In 2006, you receive a distribution of $125,000. Both distributions meet the requirements for a qualified hurricane distribution. If you decide to treat the entire $50,000 received in 2005 as a qualified hurricane distribution, only $50,000 of the 2006 distribution could be treated as a qualified hurricane distribution.

Main home. Generally, your main home is the home where you live most of the time. A temporary absence due to special circumstances, such as illness, education, business, military service, evacuation, or vacation will not change your main home.

Eligible retirement plan. An eligible retirement plan can be any of the following.

A qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan).
A qualified annuity plan.
A tax-sheltered annuity contract.
A governmental section 457 deferred compensation plan.
A traditional, SEP, SIMPLE, or Roth IRA.

Additional 10% tax Qualified hurricane distributions are not subject to the 10% additional tax (including the 25% additional tax for certain distributions from SIMPLE IRAs) on early distributions from qualified retirement plans (including IRAs). However, any distributions you received in excess of the $100,000 qualified hurricane distribution limit may be subject to the additional tax on early distributions.

Repayment of Qualified Hurricane Distributions

Most qualified hurricane distributions are eligible for repayment to an eligible retirement plan. Payments received as a beneficiary (other than a surviving spouse), periodic payments (other than from IRAs), and required minimum distributions are not eligible for repayment. Periodic payments, for this purpose, are payments that are for (a) a period of 10 years or more, (b) your life or life expectancy, or (c) the joint lives or joint life expectancies of you and your beneficiary. For distributions eligible for repayment, you have 3 years from the day after the date you received the distribution to repay all or part to any plan, annuity, or IRA to which a rollover can be made. Within the time allowed, you may make as many repayments as you choose. The total amount repaid cannot be more than the amount of your qualified hurricane distributions. Amounts repaid are treated as a qualified rollover and are not included in income. The way you report repayments depends on whether you reported the distributions under the 3-year method, or you elected to report the distributions in the year of distribution.

Repayment of distributions if reporting under the 1-year election. If you elect to include all of your qualified hurricane distributions received in a year in income for that year and then repay any portion of the distributions during the allowable 3-year period, the amount repaid will reduce the amount included in income for the year of distribution. If the repayment is made after the due date (including extensions) for your return for the year of distribution, you will need to file a revised Form 8915 with an amended return. See Amending Your Return, later.

Example.

Maria received a $45,000 qualified hurricane distribution on November 1, 2005. After receiving reimbursement from her insurance company for a casualty loss, Maria repays $45,000 to an IRA on March 31, 2006. She reports the distribution and the repayment on Form 8915, which she files with her timely filed 2005 tax return. As a result, no portion of the distribution is included in income on her return.

Repayment of distributions if reporting under the 3-year method. If you are reporting the distribution in income over the 3-year period and you repay any portion of the distribution to an eligible retirement plan before filing your 2005 tax return by the due date (including extensions) for that return, the repayment will reduce the portion of the distribution that is included in income in 2005. If you repay a portion after the due date (including extensions) for filing your 2005 return, the repayment will reduce the portion of your distribution that is includible on your 2006 return. If, during a year in the 3-year period, you repay more than is otherwise includible in income for that year, the excess may be carried forward or (after 2005) back to reduce the amount included in income for that year.

Example.

John received a $90,000 qualified hurricane distribution from his pension plan on November 15, 2005. He does not elect to include the entire distribution in his 2005 income. Without any repayments, he would include $30,000 of the distribution in income on each of his 2005, 2006, and 2007 returns. On November 10, 2006, John repays $45,000 to an IRA. He makes no other repayments during the allowable 3-year period. John may report the distribution and repayment in either of the following ways.

Report $0 in income on his 2006 return, and carry the $15,000 excess repayment ($45,000 - $30,000) forward to 2007 and reduce the amount reported in that year to $15,000, or
Report $0 in income on his 2006 return, report $30,000 on his 2007 return, and file an amended return for 2005 to reduce the amount previously included in income to $15,000 ($30,000 - $15,000).

Amending Your Return

If, after filing your original return, you make a repayment, the repayment may reduce the amount of your qualified hurricane distributions that were previously included in income. Depending on when a repayment is made, you may need to file an amended tax return to refigure your taxable income.

If you make a repayment by the due date of your original return (including extensions), include the repayment on your amended return.

If you make a repayment after the due date of your original return (including extensions), include it on your amended return only if either of the following apply.

You elected to include all of your qualified hurricane distributions in income in the year of the distributions (not over 3 years) on your original return.
The amount of the repayment exceeds the portion of the qualified hurricane distributions that are includible in income for 2006 and you choose to carry the excess back to your 2005 tax return.

Example.

You received a qualified hurricane distribution in the amount of $90,000 on October 15, 2005. You choose to spread the $90,000 over 3 years ($30,000 in income for 2005, 2006, and 2007). On November 19, 2006, you make a repayment of $45,000. For 2006, none of the qualified hurricane distribution is includible in income. The excess repayment of $15,000 can be carried back to 2005. Also, rather than carry the excess repayment back to 2005, you can carry it forward to 2007.

File Form 1040X, Amended U.S. Individual Income Tax Return, to amend a return you have already filed. Generally, Form 1040X must be filed within 3 years after the date the original return was filed, or within 2 years after the date the tax was paid, whichever is later.

Repayment of a Qualified Distribution for the Purchase or Construction of a Main Home

If you received a distribution to purchase or construct a main home in the Hurricane Katrina, Rita, or Wilma disaster area, but that home was not purchased or constructed because of Hurricane Katrina, Rita, or Wilma, you can repay that distribution if all of the following apply.

The distribution was received after February 28, 2005, and before:
1. August 29, 2005, for Hurricane Katrina,
2. September 24, 2005, for Hurricane Rita, or
3. October 24, 2005, for Hurricane Wilma.
The distribution was one of the following.
1. A hardship distribution from a 401(k) plan or a tax-sheltered annuity contract.
2. A qualified first-time homebuyer distribution from an IRA.
The distribution is repaid to an eligible retirement plan after August 24, 2005 (Hurricane Katrina); after September 22, 2005 (Hurricane Rita); or October 22, 2005 (Hurricane Wilma); and before March 1, 2006.

For this purpose, an eligible retirement plan is any plan, annuity, or IRA to which a qualified rollover can be made. A repayment to an IRA is not considered a qualified rollover for purposes of the one-rollover-per-year limitation for IRAs.

A qualified distribution (or any portion thereof) not repaid before March 1, 2006, may be taxable for 2005 and subject to the 10% additional tax on early distributions.

You may be able to designate a qualified distribution as a qualified hurricane distribution, subject to the rules discussed earlier, if all of the following apply.

You received the distribution:
1. After August 24, 2005, and before August 29, 2005, for Hurricane Katrina;
2. On September 23, 2005, for Hurricane Rita;
3. On October 23, 2005, for Hurricane Wilma.
The distribution (or any portion thereof) is not repaid before March 1, 2006.
The distribution can otherwise be treated as a qualified hurricane distribution.