2004 Working Families Tax Relief Act: selected highlights.The following are selected highlights of the 2004 Working Families Tax Relief Act signed into law Oct. 4: CHANGES AFFECTING INDIVIDUALS Child Tax Credit Under the existing law, for 2004, an individual may claim a $1,000 tax credit for each qualifying child under the age of 17. In general, a qualifying child is an individual for whom the taxpayers can claim a dependency exemption and who is the taxpayer's son or daughter (or descendent of either); stepson step·son n. A spouse's son by a previous union. stepson Noun a son of one's husband or wife by an earlier relationship Noun 1. or step-daughter STEP-DAUGHTER. In Latin privigna, is the daughter of one's wife, or of one's husband. (or descendent of either); or eligible foster child. Table 1 (above) shows the amount of the child tax credit that was scheduled under the old law for post- post- word element [L.], after; behind. post- pref. 1. After; later: postpartum. 2. Behind; posterior to: postaxial. 2004 years and the credit under the new law. Refundability Under the old law, for 2004, the child credit was refundable Refundable Eligible for refunding under the terms of a bond indenture. to the extent of 10 percent of the taxpayer's taxable earned income Sources of money derived from the labor, professional service, or entrepreneurship of an individual taxpayer as opposed to funds generated by investments, dividends, and interest. (which is taken into account in determining taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. ) in excess of $10,750 (indexed for inflation). This percentage is increased to 15 percent for tax years 2005 and thereafter. The new law accelerates to 2004 the increase in refundability of the child credit to 15 percent of the taxpayer's earned income exceeding $10,750 (with indexing). Combat Pay Treated as Earned Income The new law provides that combat pay, otherwise excluded from gross income under IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. Sec. 112, is treated as earned income, which is taken into account in computing computing - computer taxable income for purposes of calculating the refundable portion of the child credit. This new provision is effective for tax years beginning after 2003. The new law also provides that any taxpayer may elect to treat combat pay, otherwise excluded from gross income under Sec. 112, as earned income for purposes of the earned income credit Earned Income Credit A tax credit for low-income workers, even if no income tax was withheld from the worker's pay. Notes: This credit varies with family size, income and the number of children. . This election is available for any tax year ending after Oct. 4, 2004 and before 2006. Marriage Penalty Relief Increased Basic Standard Deduction The name given to a fixed amount of money that may be subtracted from the adjusted gross income of a taxpayer who does not itemize certain living expenses for Income Tax purposes. Individuals who do not itemize To individually state each item or article. Frequently used in tax accounting, an itemized account or claim separately lists amounts that add up to the final sum of the total account on claim. deductions may choose the basic standard deduction, plus additional standard deductions if they are 65 years old or over or blind. The size of the basic standard deduction varies according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. filing status and is adjusted annually for inflation. For 2004, the basic standard deduction amounts are: * $9,700 for married individuals filing joint returns; * $4,850 for unmarried individuals; * $4,850 for married individuals filing separate returns; and * $7,150 for heads of households. The following table shows the basic standard deduction for married couples filing joint returns, as a percentage of the standard deduction for unmarried individuals, that was scheduled under the old law for post-2004 years: 2005 174% 2006 184% 2007 187% 2008 190% 2009 200% 2010 200% The new law increases the basic standard deduction for joint returns to twice the basic standard deduction for single returns, effective for 2005-08. Therefore, the basic standard deduction for joint returns will be twice the basic standard deduction for single returns for tax years 2004 through 2010. [ILLUSTRATION OMITTED] Caution: For tax years beginning after 2010, absent further legislation, the lower pre- pre- word element [L.], before (in time or space). pre- pref. 1. Earlier; before; prior to: prenatal. 2. 2001 Tax Act statutory basic standard deduction dollar amount, adjusted annually for inflation, will apply to married couples filing joint returns. Expanded 15-Percent Bracket In programming, brackets (the [ and ] characters) are used to enclose numbers and subscripts. For example, in the C statement int menustart [4] = ; the [4] indicates the number of elements in the array, and the contents are enclosed in curly braces. For Married Couples Filing Joint Returns Under the 2001 Tax Act, the 15 percent regular income tax rate bracket was increased for a married couple filing a joint return to twice the size of the corresponding bracket for an unmarried individual filing a single return. Before the 2001 Tax Act's effective date for this provision, the difference was 167 percent. This increased bracket was effective for tax years beginning after 2004, but was phased in over four years as follows: Tax Year Phase-in % 2005 180% 2006 187% 2007 193% 2008-2010 200% The 2003 Tax Act increased the size of the 15 percent regular income tax rate bracket for joint returns to twice the width of the 15 percent bracket for single returns for tax years beginning in 2003 and 2004. The 2004 Tax Act increases the size of the 15 percent tax rate bracket for joint returns to twice the size of the corresponding tax rate bracket for single returns effective for 2005-2007. Therefore, the size of the 15 percent tax rate bracket for joint returns is twice the size of the corresponding tax rate bracket for single returns for tax years 2003 through 2010. Caution: This increase in the 15 percent bracket for married couples filing joint returns will be repealed for tax years beginning after 2010, unless new legislation is enacted. 10 Percent Regular Income Tax Rate Bracket For tax years beginning after 2000, the 2001 Tax Act created a new 10 percent bracket that applied to the following portions of taxable income: * Single: first $6,000 * Heads of households: first $10,000 * Married filing jointly Married Filing Jointly A filing status for married couples that have wed before the end of the tax year. They can record their respective incomes, exemptions and deductions on the same tax return. Married filing jointly is best if only one spouse has a significant income. : first $12,000 For tax years beginning after 2008, the taxable income levels for the 10 percent bracket will be adjusted annually for inflation. This bracket will be rounded down to the nearest $50 for joint returns and head of household returns. The bracket for single individuals and married individuals filing separately will be one-half of the bracket for joint returns (after any inflation adjustment). The 2003 Tax Act temporarily accelerated the increase in the taxable income levels for the 10 percent bracket for 2003 and 2004. It also provided that these taxable income levels will be adjusted annually for inflation for tax years beginning after 2003. For the taxable income levels for the 10 percent bracket for 2003 through 2011, before enactment of the 2004 Tax Act, see Table 2. The 2004 Tax Act extends the size of the 10 percent tax rate bracket through 2010. Specifically, the size of the 10 percent tax rate bracket for 2005 through 2010 is set at the 2003 level--with annual indexing after 2003. Alternative Minimum Tax Nonrefundable Nonrefundable Not permitted, under the terms of an indenture, to be refundable. Personal Credits Existing law provides for certain nonrefundable personal tax credits, such as dependent care credit; credit for the elderly and disabled; adoption credit Adoption Credit A per-child tax credit for adopting a child under 18. Notes: The limit is higher if it's determined that the adopted child has special needs. See also: Child Tax Credit, Earned Income Credit, Education IRA, Exempt Income, Exemption, Expense, Qualified ; child tax credit (a portion of which may be refundable); credit for interest on certain home mortgages; HOPE Scholarship The HOPE Scholarship, created in 1993 by the state of Georgia legislature, is a university scholarship program that has been adopted by several other states. HOPE (a reverse acronym for "helping outstanding pupils educationally") is funded entirely by the revenue from the Georgia and Lifetime Learning credits Lifetime Learning Credit A federal initiative whereby a person is eligible for a non-refundable credit for a specific amount spent on higher education tuition and fees during the year. Notes: These fees can be for the person, his or her spouse, or his or her dependents. ; and credit for savers. Under the old law, for tax years beginning in 2003, all the nonrefundable personal tax credits were allowed to the extent of the full amount of the individual's regular tax and AMT See vPro. . For tax years beginning after 2003, under the old law, the credits (except the adoption credit, child credit and credit for savers) were allowed only to the extent that the individual's regular income tax exceeded the individual's tentative tentative, adj not final or definite, such as an experimental or clinical finding that has not been validated. minimum tax (determined without regard to the minimum tax foreign tax credit). The adoption credit, child credit and savers' credit were allowed to the full extent of the individual's regular tax and AMT. The new law extends the allowance of the nonrefundable personal credits to the full extent of the regular tax and AMT for tax years beginning in 2004 and 2005. Uniform Definition Of A Qualifying Child The existing law contains the following five commonly used provisions that provide benefits to taxpayers with children: dependency exemption; child credit; earned income credit; dependent care credit; and head of household filing status. Each provision has separate criteria for determining whether the taxpayer qualifies for the applicable tax benefit with respect to a particular child, such as: the relationship (if any) the child must bear to the taxpayer; the child's age; and whether the child must live with the taxpayer. Thus, with respect to the same individual, a taxpayer must determine eligibility for each benefit separately. Consequently, an individual who qualified a taxpayer for one provision did not automatically qualify the taxpayer for another provision. For tax years beginning after 2004, the new law establishes a uniform definition of qualifying child for purposes of these five benefits. A taxpayer generally may claim an individual who does not meet the uniform definition of a qualifying child (with respect to any taxpayer) as a dependent if the existing-law dependency requirements are satisfied. The new law generally does not modify the other parameters of each tax benefit (e.g., the earned income requirements of the earned income credit) or the rules for determining whether individuals other than the taxpayer's children qualify for each tax benefit. Generally, under this new uniform definition, a child is the taxpayer's qualifying child if the child satisfies each of these tests: the child has the same principal place of abode One's home; habitation; place of dwelling; or residence. Ordinarily means "domicile." Living place impermanent in character. The place where a person dwells. Residence of a legal voter. Fixed place of residence for the time being. as the taxpayer for more than one-half of the tax year; the child has a specified relationship to the taxpayer; and the child has not yet attained at·tain v. at·tained, at·tain·ing, at·tains v.tr. 1. To gain as an objective; achieve: attain a diploma by hard work. 2. a specified age. A tie-breaking rule applies if more than one taxpayer claims a child as a qualifying child. Under the new law, the old law's support and gross income tests for determining whether an individual is a dependent generally do not apply to a child who meets the uniform definition's requirements for a qualifying child. Extensions of Archer Medical Savings Accounts  This article or section is in need of attention from an expert on the subject.Please help recruit one or [ improve this article] yourself. See the talk page for details. Within limits, contributions to an Archer MSA (Metropolitan Service Area) An urban area with at least 50,000 people plus surrounding counties. There are 306 MSAs and 428 RSAs (rural service areas) in the U.S. MSAs and RSAs are used to allocate cellular licenses. are deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). in determining adjusted gross income if made by an eligible individual and are excludable from gross income and wages for employment tax purposes if made by an eligible individual's employer. Earnings on amounts in an Archer MSA are not currently taxable. Distributions from an Archer MSA for medical expenses are not includible in gross income. Distributions not used for medical expenses are includible in gross income. In addition, distributions not used for medical expenses are subject to an additional 15 percent tax unless the distribution is made after age 65, death or disability. Under the old law, after 2003, no new contributions may be made to Archer MSAs except by--or on behalf of--individuals who previously had Archer MSA contributions and employees who are employed by a participating employer. The new law extends Archer MSAs through Dec. 31, 2005. CHANGES AFFECTING BUSINESSES Research Credit The research credit expired ex·pire v. ex·pired, ex·pir·ing, ex·pires v.intr. 1. To come to an end; terminate: My membership in the club has expired. 2. and generally did not apply to amounts paid or incurred after June 30, 2004. The new law extends this credit for qualified amounts paid or incurred after June 30, 2004 and before Jan. 1, 2006. Work Opportunity Credit This credit expired for wages paid or incurred to an individual who began work for the employer after 2003. The new law extends the credit for two years, through Dec. 31, 2005. Welfare-to-Work Credit Under the old law, this credit did not apply to individuals who began work for the employer after 2003. The new law extends the credit for two years, through Dec. 31, 2005. Enhanced Charitable Contribution Deduction charitable contribution deduction An itemized income-tax deduction for donations of assets to Internal Revenue Service-designated organizations. Certain qualifications on this deduction apply, such as a contribution limit of 50% of a taxpayer's adjusted Under the existing law, a corporate deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. for charitable contributions charitable contribution n. in taxation, a contribution to an organization which is officially created for charitable, religious, educational, scientific, artistic, literary, or other good works. of computer technology and equipment generally is limited to the corporation's basis in the property. However, certain corporations may claim a deduction exceeding basis for qualified computer contributions. This enhanced deduction expired for contributions made during any tax year beginning after 2003. The new law extends the enhanced deduction to contributions made during any tax year beginning before 2006. Certain Expenses of Elementary and Secondary School Teachers Generally, for tax years beginning in 2002 and 2003, an "above-the-line" deduction was allowed for up to $250 annually of expenses paid or incurred by an eligible educator for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment and supplementary materials used by the eligible educator in the classroom. The new law extends this deduction for two years (i.e., for tax years beginning in 2004 and 2005). Expensing of Environmental Remediation Generally, remediation means providing a remedy, so environmental remediation deals with the removal of pollution or contaminants from environmental media such as soil, groundwater, sediment, or surface water for the general protection of human health and the environment or from a Costs Under existing law, taxpayers can elect to treat certain eligible environmental remediation expenditures, that would otherwise be capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. , as deductible in the year paid or incurred. However, eligible expenditures were those paid or incurred before 2004. The new law extends the existing law's expensing provision for two years, through Dec. 31, 2005. Suspension of 100%-of-Net Income Limitation on Percentage Depletion percentage depletion Depletion calculated as a percentage of gross income derived from a natural resource. Percentage depletion is independent of the cost of the resource. for Oil and Gas from Marginal Wells The percentage depletion method for oil and gas properties applies to independent producers and royalty owners. Generally, under this method, 15 percent of the taxpayer's gross income from an oil or gas producing property is deductible each tax year. However, the amount deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. generally may not exceed 100 percent of the property's net income in any year--the net income limitation. This limitation, for marginal wells, was suspended sus·pend v. sus·pend·ed, sus·pend·ing, sus·pends v.tr. 1. To bar for a period from a privilege, office, or position, usually as a punishment: suspend a student from school. for tax years beginning after 1997 and before 2004. [ILLUSTRATION OMITTED] The new law extends the suspension of this net income limitation for marginal wells for tax years beginning before 2006.
table 1
CHILD TAX CREDIT
OLD LAW
Tax Year Credit Amount Per Child
2005-08 $700
2009 $800
2010 $1,000
2011 & later $500
NEW LAW
Tax Year Credit Amount Per Child
2004-2010 $1,000
2011 & later $500
table 2
Pre-2004 Act
TAXABLE INCOME LEVELS FOR 10% BRACKET
Tax Year Single or Married Heads of Married
Filing Separately Households Filing Jointly
2003 $7,000 $10,000 $14,000
2004 $7,150 $10,200 $14,300
2005 $6,000 $10,000 $12,000
2006 $6,000 $10,000 $12,000
2007 $6,000 $10,000 $12,000
2008 $7,000 $10,000 $14,000
2009 $7,000 $10,000 $14,000
2010 $7,000 $10,000 $14,000
2011 Expires Expires Expires
table 3
ALTERNATIVE MINIMUM TAX
AMT EXEMPTIONS
Before the 2003 Tax Act, the following AMT exemptions applied:
Tax Year Beginning in Joint Return Single
2003 $49,000 $35,750
2004 49,000 35,750
2005 & later 45,00 33,750
The 2003 Tax Act increased the AMT exemption for individuals, as
follows:
Tax Year Beginning in Joint Return Single
2003 $58,000 $40,250
2004 58,000 40,250
2005 & later 45,000 33,750
The 2004 Tax Act extends the increased AMT exemptions to tax years
beginning in 2005. Therefore, the following exemptions will be
available:
Tax Year Beginning in Joint Return Single
2003 $58,000 $40,250
2004 58,000 40,250
2005 58,000 40,250
2006 & later 45,000 33,750
Before the 2003 Tax Act, the following AMT exemptions applied:
Tax Year Beginning in Married Filing Separately Estate or Trust
2003 $24,500 $22,500
2004 24,500 22,500
2005 & later 22,500 22,500
The 2003 Tax Act increased the AMT exemption for individuals, as
follows:
Tax Year Beginning in Married Filing Separately Estate or Trust
2003 $29,000 $22,500
2004 29,000 22,500
2005 & later 22,500 22,500
The 2004 Tax Act extends the increased AMT exemptions to tax years
beginning in 2005. Therefore, the following exemptions will be
available:
Tax Year Beginning in Married Filing Separately Estate or Trust
2003 $29,000 $22,500
2004 29,000 22,500
2005 29,000 22,500
2006 & later 22,500 22,500
Note: These AMT exemptions are not indexed for inflation.
By Stuart R. Josephs, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. Stuart R. Josephs, CPA, has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee sub·com·mit·tee n. A subordinate committee composed of members appointed from a main committee. subcommittee Noun of CalCPA's Committee on Taxation, can be reached at (619) 469-6999 or sjosephs@bdo.com. |
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