As expected, President Bush signed into law the Working Families Tax Relief Act of 2004 on Monday, extending a number of tax breaks for families and businesses and marking his fourth tax cut in four years.
The legislation creates a uniform definition of qualifying child for the dependency exemption, the child credit, the earned income credit, the dependent care credit, and head of household filing status. There are also technical, conforming and clerical amendments to recently enacted tax laws.
Many of the extenders affect tax relief enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001, of which the sunset provisions remain in effect. Here's a summary of the major provisions of the Working Families Tax Relief Act of 2004.
Extenders for Individuals
* Child credit. The child credit is increased to $1,000 for taxable years 2005 through 2009. The increase in the refundability of the child credit to 15 percent of earned income in excess of $10,750 (with indexing) is accelerated applicable to taxable years beginning after Dec. 31, 2003. Combat pay otherwise excluded from gross income under Section 112 is treated as earned income for computing taxable income for calculating the refundable portion of the child credit, effective for taxable years beginning after Dec. 31, 2003. Also, an election is available to treat combat pay otherwise excluded from gross income under Section 112 as earned income for earned income credit purposes. This election is available for taxable years ending after the act's date of enactment and before Jan. 1, 2006.
* Standard deduction marriage penalty relief. The basic standard deduction amount for joint returns is increased to twice the basic standard deduction amount for single returns effective for 2005 through 2008.
* 15 percent rate adjustment. The size of the 15 percent rate bracket for joint returns is increased to twice the size of the corresponding rate bracket for single returns effective for 2005 through 2007.
* Size of 10 percent rate bracket. The size of the 10 percent rate bracket is extended for 2005 through 2010, and is set at the 2003 level ($7,000 for single individuals, $10,000 for heads of households and $14,000 for married individuals) with annual indexing from 2003.
* Increased AMT 2005 exemption. The act extends the increased alternative minimum tax exemption amounts to taxable years beginning in 2005.
* Nonrefundable personal credits and the AMT. For taxable years beginning in 2003, certain nonrefundable personal tax credits are allowed to the extent of the individual's regular tax and AMT. They are the dependent care credit, the credit for the elderly and disabled, the adoption credit, the child tax credit (could be a portion of), the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, and the D.C. first-time homebuyer credit. For taxable years beginning after 2003, these credits, other than the adoption credit, child credit and credit for savers, would have been allowed only to the extent that the individual's regular income tax liability exceeds the individual's tentative minimum tax, determined without regard to the minimum tax foreign tax credit. The act reinstates and extends the expired provision retroactively, allowing the nonrefundable personal credits to the full extent of the regular tax and the AMT for taxable years beginning in 2004 and 2005.
* Teachers' above-the-line deduction. The up-to-$250 above-the-line deduction for eligible kindergarten-through-grade-12 teachers, instructors, counselors, principals or school aides is extended for two years for taxable years beginning in 2004 and 2005.
Redefinition of child
A uniform definition of qualifying child is created for the dependency exemption, the child credit, the earned income credit, the dependent care credit, and head of household filing status. The Conference Report (H. Rept. 108-696) indicates that a taxpayer generally may claim an individual who doesn't meet the uniform definition of qualifying child as a dependent if the present-law dependency requirements are satisfied.
Generally under the uniform definition, a child is a qualifying child if the child satisfies each of three tests. They are (1) the child has the same principal place of abode as the taxpayer for more than one half the taxable year; (2) the child has a specified relationship to the taxpayer; and (3) the child hasn't attained a specified age. A tie-breaking rule applies if more than one taxpayer claims a child as a qualifying child.
The Conference Report points out that the present-law support and gross income tests for determining if an individual is a dependent generally don't apply to a child who meets the requirements of the uniform definition of qualifying child.
To be a qualifying child, the child must be the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister or a descendant of any such individual. An adopted child is treated as a child by blood, if the individual is legally adopted by the taxpayer, or is an individual who is lawfully placed with the taxpayer for legal adoption.
The age test varies depending upon the tax benefit. Generally, a qualifying child must be under the age of 19 (or under the age of 24 in the case of a full-time student). In general, no age limit applies for those totally and permanently disabled within the meaning of Section 22(e)(3).
The present-law rule that allows a custodial parent to release the claim to a dependency exemption (and, therefore, the child credit) to a noncustodial parent is basically retained.
The above changes are effective for taxable years beginning after Dec. 31, 2004.
* Research credit. The Section 41 credit, which would have expired, is extended for qualified amounts paid or incurred after June 30, 2004, and before Jan. 1, 2006.
* Work opportunity and welfare-to-work tax credits. The work opportunity tax and welfare-to-work credits are extended for two years through Dec. 31, 2005.
* Qualified zone academy bonds. The authority to issue qualified zone academy bonds is extended through 2005.
* Charitable contribution of computer technology. The enhanced charitable deduction for qualified computer technology and equipment contributions is extended to contributions made during any taxable year beginning before Jan. 1, 2006.
* Expensing of remediation costs. The Section 198 election to immediately deduct certain environmental remediation expenditures that would otherwise be chargeable to capital account is extended through Dec. 31, 2005. The deduction applies for both regular and AMT tax purposes.
* Combined employment tax reporting. Authority is provided through Dec. 31, 2005, for any state to participate in a combined federal and state employment tax-reporting program approved by the Secretary. The authority takes effect on the act's date of enactment.
* Electricity from renewable resources. The income tax credit allowed for the production of electricity from either qualified wind energy, qualified "closed-loop" biomass or qualified poultry waste facilities is extended to include facilities placed in service prior to Jan. 1, 2006.
* Percentage depletion limitation. The suspension of the net-income limitation for marginal wells is extended to taxable years beginning before Jan. 1, 2006.
* New York Liberty Zone bonds. The authority to issue Liberty Zone bonds, tax-exempt private activity bonds authorized for the purpose of financing the construction and repair of infrastructure in New York City, is extended through Dec. 31, 2009. The additional advance refunding authority is also extended through Dec. 31, 2005. Also, the Municipal Assistance Corporation is eligible for advance refunding as if included in the amendments made by Section 301 of the Job Creation and Worker Assistance Act of 2002.
* Tax incentives for investment in the District of Columbia. The D.C. Zone designation and related tax incentives for certain economically depressed census tracts within the District of Columbia is extended for two years through 2005. A provision relating to tax-exempt financing incentives applies to obligations issued after the act's date of enactment. Likewise, the nonrefundable tax credit of up to $5,000 of the purchase price for first-time homebuyers is extended for two years.
* Qualified electric vehicles and clean-fuel vehicles. The act repeals the 2004 and 2005 phase-down for the tax credit for electric vehicles and deduction for clean-fuel vehicles. The Conference Report indicates that both the credit and the deduction remain at 25 percent of the otherwise allowable amount for vehicles purchased in 2006.
* Medical savings accounts. MSAs are extended through Dec. 31, 2005. Reports required by MSA trustees for 2004 are treated as timely if made within 90 days after the act's date of enactment. In addition, the determination of whether 2004 is a cut-off year and the publication of such determination is to be made within 120 days of the date of enactment. If 2004 is a cut-off year, the cut-off date will be the last day of the 120-day period.
* Tax breaks related to Indians. The Indian employment credit incentive is extended for one year, to taxable years beginning before Jan. 1, 2006. Also, eligibility for the special accelerated depreciation periods for "qualified Indian reservation property" will apply to property placed in service before Jan. 1, 2006.
* Disclosure and student loans. There is a one-year extension of the exception to the general rule prohibiting disclosure of return information to the Department of Education (but not to contractors thereof) to establish an appropriate repayment amount for an applicable student loan. It will now expire for disclosures made after Dec. 31, 2005.
* Terrorist activities. The act extends the disclosure authority relating to terrorist activities through Dec. 31, 2005. A technical change clarifies that a taxpayer's identity is not treated as taxpayer return information for purposes of disclosures to law enforcement agencies regarding terrorist activities. That change is effective as if included in Section 201 of the Victims of Terrorism Tax Relief Act of 2001.
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