Additional Tax Relief for Individuals

You can elect to use your 2004 earned income to figure your earned income credit (EIC) and additional child tax credit for 2005 if:

1. Your 2005 earned income is less than your 2004 earned income, and
2. At least one of the following statements is true.
   1. Your main home on August 25, 2005, was in the Gulf Opportunity (GO) Zone.
   2. Your main home on August 25, 2005, was in the Hurricane Katrina disaster area and you were displaced from that home because of Hurricane Katrina.
   3. Your main home on September 23, 2005, was in the Rita GO Zone.
   4. Your main home on September 23, 2005, was in the Hurricane Rita disaster area and you were displaced from that home because of Hurricane Rita.
   5. Your main home on October 23, 2005, was in the Wilma GO Zone.
   6. Your main home on October 23, 2005, was in the Hurricane Wilma disaster area and you were displaced from that home because of Hurricane Wilma.

For the purpose of this election, your earned income for both the EIC and the additional child tax credit is the amount of earned income used to figure your EIC, even if you did not take the EIC and even if that amount is different than your earned income for the additional child tax credit. If you are claiming only the additional child tax credit, you must figure the amount of your earned income for EIC purposes to determine your eligibility to make the election and the amount of the credit.

If you file a joint return, you qualify to make this election even if only one spouse meets the requirements. If you make the election, your 2004 earned income is the sum of your 2004 earned income and your spouse's 2004 earned income.

If you make the election to use your 2004 earned income, the election applies for figuring both the EIC and the additional child tax credit. However, you can make the election for the additional child tax credit even if you do not take the EIC.

Electing to use your 2004 earned income may increase or decrease your EIC. Take the following steps to decide whether to make the election.

1. Figure your 2005 EIC using your 2004 earned income.
2. Figure your 2005 additional child tax credit using your 2004 earned income for EIC purposes.
3. Add the results of (1) and (2).
4. Figure your 2005 EIC using your 2005 earned income.
5. Figure your 2005 additional child tax credit using your 2005 earned income for additional child tax credit purposes.
6. Add the results of (4) and (5).
7. Compare the results of (3) and (6). If (3) is larger than (6), it is to your benefit to make the election. If (3) is equal to or smaller than (6), making the election will not help you.

If you elect to use your 2004 earned income and you are claiming the EIC, enter "PYEI" and the amount of your 2004 earned income on the dotted line next to line 66a of Form 1040, on the line next to line 41a of Form 1040A, or in the space to the left of line 8a of Form 1040EZ.

If you elect to use your 2004 earned income and you are claiming the additional child tax credit, enter your 2004 earned income for EIC purposes (even if you did not claim the EIC) on Form 8812, Additional Child Tax Credit, line 4a, and check the box on that line.

Because Form 8812 was released before the GO Zone legislation was enacted, the instructions refer only to individuals whose main home was in the Hurricane Katrina disaster area. When completing Form 8812, line 4a, use the above rules to determine your eligibility to make the election (instead of the Form 8812 instructions).

If you do not have your 2004 tax records, you can get the amount of earned income used to figure your 2004 EIC by calling 1-866-562-5227. You can also get this information by visiting the IRS website at www.irs.gov.

If you prefer to figure your 2004 earned income yourself, copies or transcripts of your filed and processed tax returns can help you reconstruct your tax records. See Request for Copy or Transcript of Tax Return on page 16.

You may be able to claim an additional exemption amount of $500 for providing housing in your main home for each individual displaced by Hurricane Katrina. The additional exemption amount is claimed on new Form 8914. The additional exemption amount is allowable once per taxpayer for a specific individual in 2005 or 2006, but not in both years. The maximum additional exemption amount you can claim for all displaced individuals is $2,000 ($1,000 if married filing separately). The additional exemption amount you claim for displaced individuals in 2005 will reduce the $2,000 maximum for 2006. If two or more taxpayers share the same main home, only one taxpayer in that main home can claim the additional exemption amount for a specific displaced individual. If married filing separately, only one spouse may claim the additional exemption amount for a specific displaced individual. In order for you to be considered to have provided housing, you must have a legal interest in the main home (that is, own or rent the home). To qualify as a displaced individual, the individual:

1. Must have had his or her main home in the Hurricane Katrina disaster area on August 28, 2005, and he or she must have been displaced from that home. If the individual's main home was located outside the core disaster area, that home must have been damaged by Hurricane Katrina or the individual must have been evacuated from that home because of Hurricane Katrina,
2. Must have been provided housing in your main home for a period of at least 60 consecutive days ending in the tax year in which the exemption is claimed, and
3. Cannot be your spouse or dependent.

You cannot claim the additional exemption amount if you received rent (or any other amount) from any source for providing the housing. You are permitted to receive payments or reimbursements that do not relate to normal housing costs, including the following.

• Food, clothing, or personal items consumed or used by the displaced individual.
• Reimbursement for the cost of any long distance telephone calls made by the displaced individual.
• Reimbursement for the cost of gasoline for the displaced individual's use of your vehicle.

However, you cannot claim the additional exemption amount if you received any reimbursement for the extra costs of heat, electricity, or water used by the displaced individual.

Also, you must report on Form 8914 the displaced individual's social security number or individual taxpayer identification number to claim an additional exemption amount.

For more information, see Form 8914.

The education credits have been expanded for students attending an eligible educational institution located in the Gulf Opportunity Zone (GOZ students) for any tax year beginning in 2005 or 2006. The Hope credit for a GOZ student is increased to 100% of the first $2,000 in qualified education expenses and 50% of the next $2,000 of qualified education expenses for a maximum credit of $3,000 per student. The lifetime learning credit rate for a GOZ student is increased from 20% to 40%.

The definition of qualified education expenses for a GOZ student also has been expanded. In addition to tuition and fees required for the student's enrollment or attendance at an eligible educational institution, qualified education expenses for a GOZ student include the following.

1. Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
2. For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational institution.
3. For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the costs are not more than the greater of the following two amounts.
   1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
   2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

You will need to contact the eligible educational institution for qualified room and board costs.

For more information, see Form 8863.

Generally, if you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. However, you do not have to recapture any benefit if your mortgage loan was a qualified home improvement loan of not more than $15,000. This amount is increased to $150,000 if the loan was provided before 2011 and was used to:

• Repair damage caused by Hurricane Katrina to a residence in the Hurricane Katrina disaster area, or
• Alter, repair, or improve an existing owner-occupied residence in the GO Zone, Rita GO Zone, or Wilma GO Zone.

Generally, discharges of nonbusiness debts (such as mortgages) made after August 24, 2005, and before January 1, 2007, are excluded from income for individuals whose main home was in the Hurricane Katrina disaster area on August 25, 2005. If the individual's main home was located outside the core disaster area, the individual also must have had an economic loss because of Hurricane Katrina. Examples of an economic loss include, but are not limited to:

1. Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause;
2. Loss related to displacement from your home; or
3. Loss of livelihood due to temporary or permanent layoffs.

This relief does not apply to any debt secured by real property located outside the Hurricane Katrina disaster area.

You may also have to reduce certain tax attributes by the amount excluded. For more information, see Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Under the Gulf Opportunity Zone Act of 2005, the IRS may adjust the internal revenue laws to ensure that taxpayers do not lose a deduction or credit or experience a change of filing status in 2005 or 2006 as a result of a temporary relocation caused by Hurricane Katrina, Rita, or Wilma. However, any such adjustment must ensure that an individual is not taken into account by more than one taxpayer for the same tax benefit. The IRS has exercised this authority as follows.

• In determining whether you furnished over one-half of the cost of maintaining a household, you can exclude from total household costs any assistance received from the government or charitable organizations because you were temporarily relocated as a result of Hurricane Katrina, Rita, or Wilma.
• In determining whether you provided more than one-half of an individual's support, you can disregard any assistance received from the government or charitable organizations because you were temporarily relocated as a result of Hurricane Katrina, Rita, or Wilma.
• You can treat as a student an individual who enrolled in school before August 25, 2005, and who is unable to attend classes because of Hurricane Katrina, for each month of the enrollment period that individual is prevented by Hurricane Katrina from attending school as planned.
• You can treat as a student an individual who enrolled in school before September 23, 2005, and who is unable to attend classes because of Hurricane Rita, for each month of the enrollment period that individual is prevented by Hurricane Rita from attending school as planned.
• You can treat as a student an individual who enrolled in school before October 23, 2005, and who is unable to attend classes because of Hurricane Wilma, for each month of the enrollment period that individual is prevented by Hurricane Wilma from attending school as planned.