Courtesy of David & Mary Mellem, EAs

Working Families Tax Relief Act of 2004

Extension of Family Tax Provisions

A. Child tax credit ­ Increased to $1,000 per qualifying child. This keeps the $1,000 level through 2010.

B. Marriage penalty relief

- Increased standard deduction continues at double the single rate through 2010.
- Increased 15% tax bracket ceiling continues at double the single rate through 2010.

C. 10% rate bracket ­ The $7,000 (single) and $14,000 (Married filing jointly) levels continue through 2007 before they decrease back to the former levels ($6,000-Single, $12,000-MFJ).

D. Increase in refundable Child Tax Credit

- The scheduled increase in the refundable portion to 15% (from 10%) was to take place starting in 2005. Now this starts with 2004 tax returns. The $10,000 base remains at the $10,000 level.
- Any combat pay excluded from income is considered earned income for purposes of the refundable child tax credit effective with years beginning on or after January 1, 2004.
E. Alternative Minimum Tax relief ­ The current provision of a higher exemption amounts scheduled to end after 2004 is now extended through 2005.

F. Earned Income Tax Credit & Combat Pay ­ The combat pay excluded under §112 is not earned income under old law. Now the taxpayer can elect to treat excluded combat pay as earned income starting with years ending in 2004 and 2005 (before January 1, 2006). The process for this election is not identified in the law, so will be coming from the IRS.

G. Uniform Definition of Child

- Dependent ­ A dependent now means a qualifying child or a qualifying relative. Changes include:
1) An individual who is a dependent of a taxpayer for a year cannot have dependents of his/her own for the same year (§152(b)(1)).
2) “Qualifying child”
--a) This includes:
----i) A child of the taxpayer or descendent of such child, or
----ii) A brother, sister, stepbrother, or stepsister of the taxpayer, or a descendent of such relative,
--b) The child must have the same principal abode as the taxpayer for more than one-half of the year.
--c) The child must meet the age requirements which is:
----i) Under the age of 19 at the end of the year,
----ii) Under the age of 24 AND a full time student for parts of at least five months during the year, or
----iii) Permanently and totally disabled at any time during the year.
------(a)A child who has not provided over one half of his/her own support for the year.
------(b) In the case of two or more claiming a qualifying child, the dependency belongs to the parent of the child.
----iv) If neither taxpayer is the parent of the child, the dependency belongs to the taxpayer with the highest adjusted gross income.
----v) If both taxpayers are parents of the child and are not filing a married filing jointly return, the child is the qualifying child of the parent with whom the child resided for the longest period of time during the year. If the time is the same with each parent, the child is the qualifying child of the parent with the highest adjusted gross income.

3) A child’s dependency exemption belongs to the noncustodial parent if all of the following three conditions are met:
--a) The child’s parents provided over one-half of the child’s support for the year.

--b) The parents are:
----i) Divorced or legally separated under a decree of divorce or separate maintenance,
----ii) Separated under a written separation agreement, or
----iii) Live apart at all times during the last 6 months of the year.

--c) Either:
----i) A decree of divorce of divorce or separate maintenance or written separate agreement designated the noncustodial parent is entitled to the dependency exemption, or
----ii) The custodial parent signs a written declaration that he/she will not claim the child as a dependent for the year.
4) “Qualifying Relative”
--a) This includes:
----i) A child or a descendant of a child,
----ii) A brother, sister, stepbrother, or stepsister, or a descendant of such,
----iii) A father or mother, or an ancestor or sibling of either,
----iv) A stepfather or stepmother,
----v) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law, or
----vi) An individual who has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household for the entire year.
--b) The gross income is less than the exemption amount. Income from a sheltered workshop is not considered income of a taxpayer who is totally and permanently disabled if the availability of medical care at the workshop is the principal reason for the taxpayer to be there and the income is solely from activities at the workshop are incident to such care.
--c) The taxpayer provides over one-half of the individual’s support for the year.
--d) A “child” for this purpose includes an individual who is:
----i) The son, daughter, stepson, or stepdaughter of the taxpayer, or
----ii) An eligible foster child of the taxpayer. A “foster child” means an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

5) An individual is still not considered to be living with the taxpayer if the relationship between the individual and the taxpayer is in violation of local law.

6) Changes were not made in relation to:
--a) The multiple support agreement.
--b) Kidnapped children, except it was extended to cover other qualifying relatives which have not attained the age of 18.

H) Head of Household status ­ In order to claim HH status, the taxpayer’s home must be the home of a qualifying child as defined above. If the child is married, the taxpayer has to be able to claim the child in order to receive HH status.

I) Child Tax Credit & Child Care Credit ­ These were modified to refer to the definition of “qualifying child” as given above.

J) Earned Income Tax Credit ­ The same definition given above for “qualifying child” applies for the EITC except for the “did not provide over one-half of his/her own support for the year” provision. This provision is ignored for EITC purposes.

K) Other ­ Many other code sections were amended to remove references to various subparagraphs of §151 and replace them with references to subparagraphs of §152. As a result, there may be changes Congress did not intend. Only time will tell.

The provisions relating to Uniform Definition are effective for years beginning after December 31, 2004.

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Extensions of Expiring Provisions

1) Research Credit ­ Retroactively extended from June 30, 2004 to December 31, 2005.

2) Work Opportunity Credit and Welfare-to-Work Credit ­ Retroactively extended to December 31, 2005.

3) Qualified Zone Academy Bonds ­ Retroactively extended to December 31, 2005.

4) Tax on Distilled Spirits ­ Retroactively extended to December 31, 2005.

5) Deduction for Corporate Donations of Scientific Property and Computer Technology - Retroactively extended to December 31, 2005.

6) Deduction for Certain Expenses of School Teachers ­ Retroactively extended to December 31, 2005.

7) Expensing of Environmental Remediation Costs - ­ Retroactively extended to December 31, 2005.

8) Certain New York Liberty Zone Benefits. Various extensions dealing with tax-exempt bond financing and advance refundings.

9) Tax Incentives for Investment in the District of Columbia. Various extensions including:
--a) Designation of zone (through 2005),
--b) Tax-exempt economic development (through 2005),
--c) Zero capital gains Rate (through 2005),
--d) First-time Homebuyer Credit (through 2005).
10) Alternative Minimum Tax ­ The nonrefundable personal credits will continue to be used against both the regular and minimum tax liabilities through 2005 (instead of only through 2003).

11) Credit for Electricity Produced from Certain Renewable Resources - Retroactively extended to December 31, 2005.

12) Taxable Income Limit on Percentage Depletion for Oil and Natural Gas Produced From Marginal Properties - Retroactively extended to December 31, 2005.

13) Indian Employment Tax Credit - Extended to December 31, 2005.

14) Accelerated Depreciation for Business Property on Indian Reservations - Extended to December 31, 2005.

15) Phaseout of Credit for Qualified Electric Vehicles for 2004 & 2005 ­ The phaseout does apply to vehicles placed in service in 2004 or 2005. The credit is phased out by 75% for vehicles placed in service after 2005.

16) Phaseout of Deduction for Qualified Clean-Fuel Vehicles for 2004 & 2005 ­ The phaseout does apply to vehicles placed in service in 2004 or 2005. The deduction is phased out by 75% for vehicles placed in service after 2005.

17) Medical Savings Accounts ­ Retroactively extended to December 31, 2005.

18) Medicare+Choice MSAs ­ These are now called Medicare Advantage MSAs.