The Working Families Tax Relief Act of 2004

By Mark H. Levin

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JANUARY 2005 - On October 4, 2004, President Bush signed the Working Families Tax Relief Act of 2004, which extends various personal income tax reductions for middle-class taxpayers that had been scheduled to expire. The act also extends several business-related provisions that had been scheduled to expire at the end of 2004 and 2005.

Child Tax Credit

The child tax credit, $1,000 for 2004, was scheduled to revert to $700 for 2005 through 2008, increase to $1,000 by 2010, and then revert to $500 under the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001.

The new legislation retains the child tax credit at its 2004 level of $1,000 for 2005 through 2010. The act also accelerates the increase in refundability of the child credit to 15% of the taxpayer’s earned income in excess of $10,750 (with indexing) for 2004. (This provision was not scheduled to go into effect until 2005.)

In addition, the act allows taxpayers to treat combat pay that has been excluded from the computation of gross income under IRC section 112 as earned income for the purposes of computing the refundable portion of the child tax credit. The child tax credit, along with its refundability, will still sunset after 2010.

Standard Deduction and Tax Brackets

Under the 2001 Tax Act, the basic standard deduction for joint returns was to increase over a period of years from 167% of the basic standard deduction available to single taxpayers to 200% in 2009 and 2010. The new legislation accelerates the increase of the basic standard deduction for joint returns to 200% of the basic standard deduction available to single taxpayers from 2005 through 2010. After 2010, the basic standard deduction for joint returns will revert to 167% of the basic standard deduction available to single taxpayers, as per the original sunset provisions.

Under the 2001 Tax Act, the bracket available to joint filers was to increase over a period of years from 167% of the width of the 15% available to single taxpayers to 200% of the width of the 15% bracket available to single taxpayers for 2008 and 2010. The new legislation accelerates the increase of the width of the joint filers’ 15% bracket to 200% of the width of the 15% bracket available to single taxpayers from 2005 through 2010. The bracket available to joint filers will revert to 167% of the width of the 15% bracket available to single taxpayers after 2010, as in the original sunset provisions.

The 2001 Tax Act created a temporary 10% rate bracket that, for 2004, applied to the first $7,150 of taxable income for single individuals, and $14,300 for joint filers. The width of this bracket was to decrease, for 2005 through 2008, to $6,000 and $12,000, respectively, before becoming indexed for inflation in 2009 and 2010.
The new legislation increases the width of this 10% bracket for 2005 through 2010 to the first $7,000 of taxable income for single individuals, $14,000 for joint filers. The 10% bracket will disappear in 2011, as in the original sunset provisions.

Alternative Minimum Tax

Under existing law, individuals were entitled to an AMT exemption of $58,000 for married couples filing jointly, $22,500 for married individuals filing separately, $40,250 for single individuals, and $33,750 for estates and trusts. After 2004, these exemption amounts were scheduled to sunset to 2000 levels. The new legislation extends the increased AMT exemption levels to 2005. This exemption does not extend into 2006, when it will revert to the 2000 level of $45,000.

Beginning in 2003, all nonrefundable personal tax credits are allowed to the extent of the full amount of an individual’s regular tax and the AMT. The act extends the provision allowing nonrefundable personal tax credits to the extent of the full amount of an individual’s regular tax and the AMT, beginning in 2004 and 2005.

Teacher Expenses

The above-the-line deduction of up to $250 for certain expenses of elementary and secondary school teachers, allowable in 2002 and 2003, was to expire at the end of 2003. The new legislation extends the deduction to 2004 and 2005.

Uniform Definition of a Qualifying Child

Under existing law, the definition of a qualifying child was not consistent throughout the IRC. The act establishes a uniform definition of a qualifying child for the purposes of the dependency exemption, the child credit, the dependent care credit, and the head of household credit.

In creating a uniform definition of a qualifying child, the act sets forth tests for residency, relationship, and age. In the event that more than one taxpayer wishes to claim a child, the legislation institutes a tie-breaking test. While there is now a basic uniform definition of a qualifying child, the act does not change certain differences, such as the earned income requirement of the earned income credit. Taxpayers that met the requirements under prior law may still claim the child as a dependent even if they do not meet the new criteria.

The residency test requires that the child have the same residence as the taxpayer for more than one half of the taxable year. The prior law exemption covering such situations as absences due to illness, education, business, vacation, or military service remains in effect.

The relationship test requires that the child must be the taxpayer’s son, daughter, stepson, stepdaughter, or a descendant of any such individual. An individual legally adopted by the taxpayer, or an individual who is placed with the taxpayer by an authorized placement agency for adoption by the taxpayer, is treated as a child of the taxpayer by blood. A foster child who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction is treated as the taxpayer’s child.

The age test varies depending upon the tax benefit. Generally, a child must be under 19 (or 24 if a full-time student) in order to be a qualifying child. In addition, there is generally no age limit that applies to any individual who is totally and permanently disabled at any time during the calendar year. The act no longer requires that a child be under 13 for the dependent care credit and under 17 (whether or not disabled) for the child tax credit.

If more than one taxpayer qualifies under the three tests above, a tie-breaking rule is used. First, if one of the taxpayers that qualifies is the parent, the child is deemed to be the qualifying child of the parent. Second, if both parents claim the child and the parents do not file jointly, then the child is deemed a qualifying child first with respect to the parent with whom the child resides for the longest period of time and second with respect to the parent with the highest adjusted gross income. If the child’s parents do not claim the child, then the child is deemed a qualifying child with respect to the claimant with the highest adjusted gross income. The act makes no changes to the rules governing the claiming of others (parents, grandchildren).

Research Tax Credit

The research tax credit generally provided a tax credit equal to 20% of the amount by which a taxpayer’s qualified research expenses for a taxable year exceeded its base amount for that year, and generally did not apply to amounts paid and incurred after June 30, 2004. The new legislation extends the research tax credit to qualified amounts paid and incurred after June 30, 2004, but before January 1, 2006.

Work Opportunity Tax Credit

The work opportunity tax credit, which generally provided employers with an elective tax credit for hiring individuals from one or more of eight targeted groups, was extended to qualified amounts paid and incurred by December 31, 2005.

Welfare-to-Work Tax Credit

The welfare-to-work tax credit, which generally gave employers an elective tax credit for hiring qualified long-term family assistance recipients from three targeted groups, was extended to qualified amounts paid and incurred by December 31, 2005.

Contributions of Computer Technology

A charitable contribution by a corporation of computer technology and equipment is generally limited to the corporation’s basis in the property. Certain corporations, however, may claim a deduction in excess of basis for a qualified computer contribution. The act extends this enhanced deduction for qualified computer contributions to contributions made in any year before January 1, 2006.

Environmental Remediation Costs

Taxpayers may elect to deduct certain environmental remediation expenditures paid or incurred during a taxable year, instead of capitalizing them. The new legislation extends this election to expenditures paid or incurred before January 1, 2006.

Renewable Resources Credit

An income tax credit is allowed for the production of electricity from either qualified wind energy, qualified “closed-loop” biomass, or qualified poultry waste facilities. The act extends the credit to such facilities placed in service prior to January 1, 2006.

Oil and Gas from Marginal Wells

Generally, under the percentage depletion method, the percentage of depletion deducted may not exceed 100% of the net income from the property in any year. The act extended the suspension of the 100% net-income limitation for marginal wells to taxable years before January 1, 2006.

Electric and Clean Fuel Vehicles

A 10% credit (up to a maximum of $4,000) is available to purchasers of qualified electric vehicles. The full 10% credit was allowed for purchases made before 2004. The new legislation extends the full 10% credit for qualified electric vehicles purchased in 2004 and 2005. For vehicles purchased in 2006, the credit remains at 25% of the amount that would have been allowable prior to 2006. The credit will still expire after 2006.

Certain costs of qualified clean-fuel vehicles may be expensed and deducted when such property is placed in service. The new legislation extends the full deduction for qualified vehicles purchased in 2004 and 2005. For vehicles purchased in 2006, the credit remains at 25% of the amount that would have been allowable prior to 2006. The credit will still expire after 2006.

Archer Medical Savings Accounts

The act extends the contributions to Archer medical savings accounts through December 31, 2005.


Mark H. Levin, CPA, is manager, state and local taxes, at H.J. Behrman & Company, LLP, New York, N.Y.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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