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On October 4, 2004, President Bush signed the Working Families Tax Relief Act of 2004. The Act extends several tax provisions that had either expired or were scheduled to expire shortly. The Act also establishes a uniform definition of "qualifying child" for purposes of several different tax provisions.
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Summary of the Working Families Tax Relief Act of 2004 (H.R. 1308) |
Child Tax Credit
Prior Law:
In 2004, an individual could claim a $1,000 tax credit for each qualifying child under the age of 17 (the credit is phased out for individuals with higher incomes). The amount of this tax credit was scheduled to decrease to $700 in 2005, and then to increase gradually until it reached $1,000 again in 2010.
For 2004, the child tax credit was refundable, but the refundable amount was limited to 10 percent of earned income in excess of a specified amount (special rules apply to families with 3 or more children). In 2005, the refundable limit was scheduled to increase to 15 percent of earned income.
Working Families Tax Relief Act of 2004
Increases child tax credit to $1,000 for tax years 2005 through 2009 Accelerates to 2004 the 15 percent limit on the refundable portion of the credit Allows combat pay (otherwise excludable from income) to be treated as earned income for purposes of calculating the refundable portion of the credit
Effective:
For taxable years beginning after December 31, 2004 (15 percent refundable limit and combat pay provision are effective for tax years beginning after December 31, 2003)
Marriage Penalty Relief -- Standard Deduction Amount
Prior Law:
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased the standard deduction amount for married couples filing jointly. This increase was to be phased in gradually, with the standard deduction for a married couple filing jointly equal to twice the standard deduction amount for an individual filing as single in 2009. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) accelerated the increase, setting the standard deduction for a married couple filing jointly to twice that of an individual filing as single for tax years 2003 and 2004.
Working Families Tax Relief Act of 2004
Increases standard deduction amount for married couples filing jointly to twice the standard deduction amount for an individual filing as single for tax years 2005 through 2008
Effective:
For taxable years beginning after December 31, 2004
Marriage Penalty Relief -- 15 Percent Marginal Income Tax Bracket
Prior Law:
EGTRRA increased the size of the 15 percent marginal income tax bracket for married individuals filing jointly to twice the size of the bracket for individuals filing as single. This increase was to be phased in gradually (full implementation would have occurred in 2008). JGTRRA accelerated the increase, setting the 15 percent tax bracket for married individuals filing jointly to twice that of single individuals for tax years 2003 and 2004.
Working Families Tax Relief Act of 2004
Increases size of 15 percent marginal income tax bracket to twice the corresponding rate bracket for individuals filing as single for tax years 2005 through 2007
Effective:
For taxable years beginning after December 31, 2004
Ten Percent Marginal Tax Bracket
Prior Law:
EGTRRA created a new 10 percent marginal tax bracket that applied to the first $6,000 of taxable income for individuals filing as single ($12,000 for married couples filing jointly). This bracket was scheduled to expand in 2008 to cover the first $7,000 of taxable income for individuals filing as single ($14,000 for married couples filing jointly). JGTRRA accelerated the expansion of the 10 percent bracket for tax years 2003 and 2004, and allowed the bracket amounts to be indexed for inflation.
Working Families Tax Relief Act of 2004
Extends the 2003 and 2004 expanded 10 percent marginal tax brackets through 2010, with indexing for inflation from 2003
Effective:
For taxable years beginning after December 31, 2004
Alternative Minimum Tax
Prior Law:
Prior to EGTRRA, the AMT exemption amounts were $33,750 for single individuals and $45,000 for married individuals filing jointly. EGTRRA increased the AMT exemption amounts to $35,750 (single) and $49,000 (married filing jointly) for tax years 2001 through 2004. JGTRRA further increased the AMT exemption amounts to $40,250 (single) and $58,000 (married filing jointly) for tax years 2003 and 2004.
Additionally, nonrefundable personal tax credits (e.g., the dependent care credit, the credit for the elderly and permanently disabled, the Hope and lifetime learning credits) were able to be applied against AMT liability for the 2003 tax year. After the 2003 tax year, only certain credits (the child tax credit, the "savers" credit, and the adoption credit) would be able to be applied against AMT liability.
Working Families Tax Relief Act of 2004
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Extends $40,250 / $58,000 AMT exemption amounts for one year (tax year 2005)
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Extends provision allowing nonrefundable personal tax credits to full extent of regular tax and AMT for tax years 2004 and 2005
Effective:
AMT exemption amounts -- for taxable years beginning in 2005
Nonrefundable personal tax credits -- for tax years beginning after December 31, 2003
Uniform Definition of Qualifying Child
Prior Law:
The definition of a qualifying child was different for purposes of determining dependency exemptions, the child credit, earned income credit, dependent care credit, and head of household filing status.
Working Families Tax Relief Act of 2004
Provides a uniform definition of qualifying child Defines qualification based on place of abode, relationship, and age Applies to determination of dependency exemptions, the child credit, earned income credit, dependent care credit, and head of household filing status Explains coordination with above provisions
Effective:
For taxable years beginning after December 31, 2004
Credit For Qualified Electric Vehicles
Prior Law:
A 10 percent tax credit was allowed for the cost of a qualified electric vehicle, up to a maximum credit of $4,000. This maximum credit amount was scheduled to be phased out from 2004 to 2006, with the maximum credit limited to 75 percent (of the $4,000 maximum) in 2004, 50 percent in 2005, and 25 percent in 2006. In 2007, no credit would have been allowed.
Working Families Tax Relief Act of 2004
Effective:
For vehicles placed in service after December 31, 2003
Deduction For Qualified Clean Fuel Vehicle Property
Prior Law:
A maximum deduction of $2,000 (higher deduction limits applied to heavy commercial equipment) was allowed for the purchase of a clean fuel vehicle. This maximum deduction amount was scheduled to be phased out from 2004 to 2006, with the maximum deduction limited to 75 percent (of the $2,000 maximum) in 2004, 50 percent in 2005, and 25 percent in 2006. In 2007, no deduction would have been allowed.
Working Families Tax Relief Act of 2004
Effective:
For vehicles placed in service after December 31, 2003
Other Extensions
The research credit -- extended to qualified amounts paid or incurred before January 1, 2006 The work opportunity tax credit -- extended for two years (through 2005) The welfare to work credit -- extended for two years (through 2005) Authority for state and local governments to issue qualified zone academy bonds -- extended for two years (through 2005) The enhanced deduction for qualified computer contributions and equipment used for educational purposes -- extended for two years (through 2005) The above-the-line deduction for certain classroom expenses of elementary and secondary school teachers -- extended to tax years 2004 and 2005 Archer Medical Savings Accounts (Archer MSAs) -- extended through December 31, 2005
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