IRS Releases Publication 4492-A (7/2008), Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes

Introduction

This publication explains the temporary tax relief provided by the Food, Conservation, and Energy Act of 2008 for taxpayers in Kiowa County, Kansas, and surrounding areas, who were affected by the storms and tornadoes that began on May 4, 2007.

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Definitions

The following definitions are used throughout this publication.

Kansas Disaster Area

The Kansas disaster area covers the Kansas counties of Barton, Clay, Cloud, Comanche, Dickinson, Edwards, Ellsworth, Kiowa, Leavenworth, Lyon, McPherson, Osage, Osborne, Ottawa, Phillips, Pottawatomie, Pratt, Reno, Rice, Riley, Saline, Shawnee, Smith, and Stafford.

Storms and Tornadoes

The term "storms and tornadoes" as used in this publication, refers to the storms and tornadoes that began on May 4, 2007, and affected the Kansas disaster area (defined above).

Casualty and Theft Losses

The following paragraphs explain changes to casualty and theft losses that occurred in the Kansas disaster area.

Limits on personal casualty or theft losses in the Kansas disaster area. Losses of personal use property that arose in the Kansas disaster area after May 3, 2007, are not subject to the $100 or 10% of adjusted gross income limits. Qualifying losses include losses from casualties and thefts that arose in the disaster area and that were attributable to the storms and tornadoes.

When to deduct the loss. Casualty and theft losses are generally deductible only in the year the casualty occurred or the theft was discovered. However, the Kansas disaster area is a Presidentially declared disaster. Therefore, you could have elected to deduct losses from these storms and tornadoes on your tax return for the previous year. The deadline for making this election has expired.

The following special instructions explain how to complete your forms if you deduct the loss in 2007 or elected to deduct the loss in 2006.

Special instructions for individuals who file Form 4684 to claim a Kansas disaster area casualty or theft loss for 2007 or are amending their 2006 return. Individuals filing or amending their 2007 tax return or amending their 2006 tax return for casualty or theft losses that were attributable to the storms and tornadoes should enter "Kansas Disaster Area" at the top of Form 1040 or 1040X. They must also complete and attach the 2006 version of Form 4684 for either year and enter "Kansas Disaster Area" on the top and on the dotted line next to line 11 and enter -0- on line 11. Individuals filing or amending their 2007 tax return should cross out "2006" and enter "2007" at the top of Form 4684. They must also enter the amount from line 21 of that form on line 20 of Schedule A (Form 1040).

Replacement Period for Nonrecognition of Gain

Generally, an involuntary conversion occurs when property is damaged, destroyed, stolen, seized, requisitioned, or condemned, and you receive other property or money in payment, such as insurance or a condemnation award. Generally, you do not have to report a gain (if any) if you replace the property within 2 years (4 years for a main home in a Presidentially declared disaster area). However, for property that was involuntarily converted after May 3, 2007, as a result of the storms and tornadoes, a 5-year replacement period applies if substantially all of the use of the replacement property is in the Kansas disaster area. For more information, see the Instructions for Form 4684.

Net Operating Losses

Qualified recovery assistance loss. Generally, you can carry a net operating loss (NOL) back to the 2 tax years before the NOL year. However, the portion of an NOL that is a qualified recovery assistance loss can be carried back to the 5 tax years before the NOL year. In addition, the 90% limit on the alternative tax NOL deduction (ATNOLD) does not apply to such portion of the ATNOLD.

A qualified recovery assistance loss is the smaller of:

Amended return. If you have already filed your 2007 tax return and then carried your NOL back 2 years, you may file an amended return to carry back for 5 years your NOL attributable to a qualified recovery assistance loss.

More information. For more information on NOLs, see Publication 536.

IRAs and Other Retirement Plans

New rules provide for tax-favored withdrawals, repayments, and loans from certain retirement plans for individuals who suffered economic losses as a result of the storms and tornadoes.

Definitions

Qualified recovery assistance distribution. Except as provided below, a qualified recovery assistance distribution is any distribution you received and designated as such from an eligible retirement plan if all of the following apply.

The total of your qualified recovery assistance 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.

A reduction or offset after May 3, 2007, of your account balance in an eligible retirement plan in order to repay a loan can also be designated as a qualified recovery assistance distribution.

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

Taxation of Qualified Recovery Assistance Distributions

Qualified recovery assistance distributions are included in income in equal amounts over three years. However, if you elect, you can include the entire distribution in your income in the year it was received.

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

For more information, see How To Report Qualified Recovery Assistance Distributions on page 4.

Repayment of Qualified Recovery Assistance Distributions

If you choose, you generally can repay any portion of a qualified recovery assistance distribution that is eligible for tax-free rollover treatment to an eligible retirement plan. Also, you can repay a qualified recovery assistance distribution made on account of a hardship from a retirement plan. However, see Exceptions below for qualified recovery assistance distributions you cannot repay.

You have three years from the day after the date you received the distribution to make a repayment. Amounts that are repaid are treated as a qualified rollover and are not included in income. Also, for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a qualified rollover. See Form 8915 for more information on how to report repayments.

Exceptions. You cannot repay the following types of distributions.

TIP. You will need the following information to correctly report any 2007 or 2008 qualified recovery assistance distributions.

2007 Qualified Recovery Assistance Distributions

If you received a distribution after May 3, 2007, from an eligible retirement plan, you may be able to designate it as a qualified recovery assistance distribution. See Qualified recovery assistance distribution on page 3.

If you have not filed your 2007 income tax return, see Form 8915 and Form 8606 on this page to see how to complete these forms for any qualified recovery assistance distributions. Be sure to attach Form 8915 and Form 8606 (if required) to your 2007 income tax return.

If you have filed your 2007 income tax return, you will need to amend your return to designate any distributions as qualified recovery assistance distributions. You can amend your 2007 income tax return by using Form 1040X. You will need to complete and attach Form 8915 and Form 8606 (if required) to your amended income tax return for any qualified recovery assistance distributions. See Form 8915 and Form 8606 on this page.

Form 8915. For a 2007 qualified recovery assistance distribution, complete the 2005 Form 8915, Qualified Hurricane Retirement Plan Distributions and Repayments. Before you complete the form, modify the form as follows.

Form 8606. For a 2007 qualified recovery assistance distribution, complete or amend the 2007 Form 8606, Nondeductible IRAs. Before you complete or amend the form, use the following additional instructions.

Form 8606, Part I.

In addition to the $15,000 qualified recovery assistance distribution on July 31, 2007, Margaret received an additional distribution of $15,000 from her traditional IRA on October 31, 2007, that she did not designate as a qualified recovery assistance distribution. Because Margaret has a qualified recovery assistance distribution as well as a distribution not so designated, Margaret must allocate the amount on Form 8606, line 15 to both distributions, as discussed earlier. Margaret's qualified recovery assistance distributions are $13,125 ($26,250 X $15,000 / $30,000). Margaret enters in the white space in the bottom margin of Form 8606, the following, "Qualified recovery assistance distributions $13,125." This amount is then reported on Form 8915, line 13. Below this entry, Margaret enters "Other distributions $13,125," and includes this amount on Form 1040, line 15b. See Margaret's modified 2005 Form 8915 and 2007 Form 8606 shown on pages 6 through 8.

If you received a distribution in 2008 from an eligible retirement plan, you may be able to designate it as a qualified recovery assistance distribution. See Qualified recovery assistance distribution on page 3. You will need to complete and attach Form 8915 and Form 8606 (if required) to your 2008 income tax return for any qualified recovery assistance distributions. See Form 8915 and Form 8606 below.

Form 8915. For a 2008 qualified recovery assistance distribution, you will need to complete the 2006 Form 8915. Before you complete the form, modify the form as follows.

Example 2. On June 15, 2008, Margaret Maple, from the previous example, took out $15,000 from her 401(k) plan that she is designating as a qualified recovery assistance distribution. Since the distribution occurred in 2008, Margaret would modify and complete the 2006 Form 8915 as discussed above. Also, since Margaret is including her 2007 recovery assistance distributions in income over 3 years, she reports the applicable amount of those distributions on the modified 2006 Form 8915. See Margaret's modified 2006 Form 8915 shown on pages 9 and 10.

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

If you received a qualified distribution to purchase or construct a main home in the Kansas disaster area, you can repay part or all of that distribution after May 3, 2007, but no later than October 22, 2008, to an eligible retirement plan. For this purpose, an eligible retirement plan is any plan, annuity, or IRA to which a qualified rollover can be made.

To be a qualified distribution, the distribution must meet all of the following requirements.

A qualified distribution not repaid before October 23, 2008, may be taxable for 2006 or 2007 and subject to the additional 10% tax (or the additional 25% tax for certain SIMPLE IRAs) on early distributions.

You must file Form 8915 if you received a qualified distribution that you repaid, in whole or in part, before October 23, 2008. See How to report, next, for information on completing Form 8915.

How to report. To report the repayment of a qualified distribution for the purchase or construction of a main home that was not purchased or constructed due to the storms and tornadoes, use the 2005 Form 8915, Part IV. Before you complete the form, modify the form as follows.

Amended return. If you repay part or all of a qualified distribution by October 22, 2008, you will need to file an amended return for that part of a distribution that was previously included in income.

Loans From Qualified Plans

The following benefits are available to qualified individuals.

One-year suspension of loan payments. Payments on plan loans outstanding after May 3, 2007, may be suspended for 1 year by the plan administrator. To qualify for the suspension, the due date for any loan payment must occur during the period beginning on May 4, 2007, and ending on December 31, 2008.

Additional Tax Relief for Businesses

Special Depreciation Allowance

You can take a special depreciation allowance for qualified recovery assistance property (as defined below) you acquire after May 4, 2007. The special allowance is an additional deduction of 50% of the property's depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction). The special allowance applies only for the first year the property is placed in service.

The special allowance is deductible for both the regular tax and the alternative minimum tax (AMT). There is no AMT adjustment required for any depreciation figured on the remaining basis of the property.

You can elect not to deduct the special allowance for qualified recovery assistance property. If you make this election for any property, it applies to all property in the same class placed in service during the year.

Qualified recovery assistance property. Property that qualifies for the special allowance for qualified recovery assistance property includes the following.

Other tests to be met. To be qualified recovery assistance property, the property must also meet all of the following tests.

Amended return. If you have already filed your tax return, you may have to amend that return to claim any special allowance. Additional guidance will be published on how you may claim, or elect not to claim, the special allowance if you have already filed your tax return.

Increased Section 179 Deduction

An increased section 179 deduction is allowable for qualified section 179 recovery assistance property (as defined later) placed in service in the Kansas disaster area.

Increased dollar limit. The limit on the section 179 deduction ($125,000 for 2007, $250,000 for 2008) is increased by the smaller of:

Amended return. If you have already filed your tax return, you may have to amend that return for any increased section 179 deduction.

Employee Retention Credit

An eligible employer who conducted an active trade or business in the Kansas disaster area can claim the employee retention credit. The credit is 40% of qualified wages for each eligible employee (up to a maximum of $6,000 in qualified wages per employee). Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). Use Form 5884-A to claim the credit. See Form 5884-A later. The following rules and definitions apply.

Employers affected by the storms and tornadoes. The following definitions apply to employers affected by the storms and tornadoes.

Eligible employer. For this purpose, an eligible employer is any employer who meets all of the following.

Qualified wages. Qualified wages are wages you paid or incurred before January 1, 2008, (up to $6,000 per employee) for an eligible employee beginning on the date your trade or business first became inoperable at the employee's principal place of employment immediately before May 4, 2007, and ending on the date your trade or business resumed significant operations at that place. In addition, the wages must have been paid or incurred after May 4, 2007.

This includes wages paid even if the employee performed no services, performed services at a place of employment other than the principal place of employment, or performed services at the principal place of employment before significant operations resumed.

Wages qualifying for the credit generally have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA). Qualified wages also include amounts you paid for medical or hospitalization expenses in connection with sickness or accident disability. Qualified wages for any employee must be reduced by the amount of any work supplementation payment you received under the Social Security Act.

For agricultural employees, if the work performed by any employee during more than half of any pay period qualified under FUTA as agricultural labor, that employee's wages subject to social security and Medicare taxes are qualified wages. For a special rule that applies to railroad employees, see section 51(h)(1)(B).

Qualified wages do not include the following.

Amended return. You may have to amend a previously filed return to claim the employee retention credit.

Demolition and Clean-up Costs

You can elect to deduct 50% of any qualified recovery assistance clean-up costs for the tax year in which the costs are paid or incurred, instead of capitalizing them. Qualified recovery assistance clean-up costs are any amounts paid or incurred after May 3, 2007, and before January 1, 2010, for the removal of debris from, or the demolition of structures on, real property located in the Kansas disaster area that is:

Request for Copy or Transcript of Tax Return

Request for copy of tax return. You can use Form 4506 to order a copy of your tax return. Generally, there is a $39.00 fee (subject to change) for requesting each copy of a tax return. If your main home, principal place of business, or tax records are located in a Presidentially declared disaster area, the fee will be waived if the assigned disaster designation (for example, "Kansas Storms") is written in red across the top of the form when filed.

Request for transcript of tax return. You can use Form 4506-T to order a free transcript of your tax return. A transcript provides most of the line entries from a tax return and usually contains the information that a third party requires. You can also call 1-800-829-1040 to order a transcript.

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

You can contact the TAS by calling the TAS toll-free case intake line at 1-877-777-4778 or TTY/TDD 1-800-829-4059 to see if you are eligible for assistance. You can also call or write to your local taxpayer advocate, whose phone number and address are listed in your local telephone directory and in Publication 1546, Taxpayer Advocate Service -- Your Voice at the IRS. You can file Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or ask an IRS employee to complete it on your behalf. For more information, go to http://www.irs.gov/advocate.

Low Income Taxpayer Clinics (LITCs). LITCs are independent organizations that provide low income taxpayers with representation in federal tax controversies with the IRS for free or for a nominal charge. The clinics also provide tax education and outreach for taxpayers who speak English as a second language. Publication 4134, Low Income Taxpayer Clinic List, provides information on clinics in your area. It is available at http://www.irs.gov or your local IRS office.

Free tax services. To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. It contains lists of free tax information sources, including publications, services, and free tax education and assistance programs. It also has an index of over 100 TeleTax topics, (recorded tax information) you can listen to on your telephone.

Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities.

Free help with your return. Free help in preparing your return is available nationwide from IRS-trained volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-income taxpayers and Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Many VITA sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. To find a site near you, call 1-800-829-1040. Or to find the nearest AARP TaxAide site, visit AARP's website at http://www.aarp.org/taxaide or call 1-888-227-7669. For more information on these programs, go to http://www.irs.gov and enter keyword "VITA" in the upper right-hand corner.

Internet. You can access the IRS website at http://www.irs.gov 24 hours a day, 7 days a week to:

Walk-in. Many products and services are available on a walk-in basis.

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CD/DVD for tax products. You can order Publication 1796, IRS Tax Products CD/DVD, and obtain:

CD for small businesses. Publication 3207, The Small Business Resource Guide CD, is a must for every small business owner or any taxpayer about to start a business. This year's CD includes: