| The
Working Families Tax Relief Act of 2004
By
Mark H. Levin
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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