As you probably know, Congress recently passed the 2004 Working Families Act, which provides a package of tax cuts for middle income families and extends more than 20 expired business-related tax provisions. Here's what you need to know right now about this important new legislation:
Family tax relief.
Child credit.
The child credit, which is $1,000 per child for 2004 but was scheduled to drop to $700 for 2005 through 2008 and to rise to $800 for 2009, will stay at $1,000 through 2010. Also, the 15% refundability percentage of the child credit is accelerated so that it applies for tax years beginning after 2003 (instead of after 2004).
Marriage penalty relief.
Two provisions that provide a measure of relief from the marriage penalty are extended by the Act. The provision setting the basic standard deduction for joint filers at twice that of single taxpayers, and the provision that increases the size of the 15-percent rate bracket for married couples filing joint returns, both of which were due to expire at the end of 2004, are extended through 2010.
Extension of relief from the alternative minimum tax (AMT).
Higher exemption amount extended.
In recent years, Congress has provided a measure of relief from the AMT by raising the AMT "exemption amounts," thereby reducing the likelihood of an AMT liability. However, this partial relief was set to expire for tax years beginning after 2004, and the exemption amounts were scheduled to revert to the lower amounts allowed under prior law. The Act preserves this partial relief from the AMT by extending the higher exemption amounts to 2005. Also, the availability of nonrefundable personal credits to offset AMT has been extended through 2005 (instead of expiring after 2003 tax years).
Uniform definition of child.
In a major tax simplification measure, the Act replaces a series of different eligibility tests for child-related benefits with a uniform definition of a child. For tax years beginning after 2004, the Act establishes a uniform definition of a qualifying child for purposes of the dependency exemption, the child credit, the earned income credit, the dependent care credit, and head of household filing status. Under the uniform definition, in general, a child is a qualifying child of a taxpayer if the child (1) has the same principal place of abode as the taxpayer for more than one half the taxable year; (2) has a specified relationship to the taxpayer; (3) has not yet attained a specified age; and (4) meets a support test.
Assistance to military families in combat zones.
The Act provides assistance to low-income military families in combat zones by (1) increasing the child credit for families by allowing them to include tax-free combat pay when calculating their refundable child credit; and (2) increasing the earned income credit (EIC) for military families in 2004 and 2005 by giving them the option to include combat pay when calculating the EIC. These provisions are expected to provide an additional $199 million of assistance to military families in combat zones.
Extension of business-related tax relief.
The Act extends the life of more than 20 expired or expiring business-related tax provisions. The tax provisions that get a new lease on life include:
Research credit.
Under pre-Act law, the research credit terminated for amounts paid or incurred after June 30, 2004. Under the Act, the credit is extended for amounts paid or incurred after June 30, 2004 and before 2006.
Work opportunity tax credit.
Under pre-Act law, this credit did not apply for wages paid or incurred to a qualified individual who began work after 2003. Under the Act, the credit is extended for wages paid or incurred for individuals beginning work after 2003 and before 2006.
Enhanced deduction for a corporation's qualified computer deductions.
Under pre-Act law, the enhanced deduction was not available for contributions made in tax years beginning after 2003. Under the Act, the enhanced deduction for qualified computer contributions is extended for contributions made in tax years beginning after 2003 and before 2006.
Above-the-line educators' deduction.
Under pre-Act law, the deduction was not available for tax years beginning after 2003. Under the Act, the above-the-line deduction for qualifying expenses of eligible educators is extended for tax years beginning during 2004 or 2005.
Credit for qualified electric vehicles.
Under pre-Act law, the otherwise allowable credit was reduced by 25% (25% phasedown) for property placed in service in 2004, 50% (50% phasedown), if placed in service in 2005, and 75% (75% phasedown), if placed in service in 2006. The credit doesn't apply for vehicles placed in service after 2006. Under the Act, the otherwise allowable credit for a qualified electric vehicle is available in full for vehicles purchased in 2004 and 2005. In other words, the Act repeals the 25% phasedown of the credit for 2004 and the 50% phasedown for 2005.
Nonrefundable personal credits allowed against regular and AMT tax liability.
Under pre-Act law, for tax years beginning after 2003, the combined total of nonrefundable personal credits (other than the adoption credit, the child credit, and the credit for elective deferrals and IRA contributions (the saver's credit)) could not be used as an offset against alternative minimum tax (AMT). Under the Act, for tax years beginning in 2004 and 2005, all of the otherwise allowable nonrefundable personal credits (not just the adoption credit, child tax credit and saver's credit) may reduce AMT.
We hope this information is helpful. If you would like more details about these or any other aspect of the new law, please do not hesitate to call any one of the estate planning lawyers at Maslon Edelman Borman & Brand, LLP.
