Working Families Tax Relief Act Of 2004 — A Summary

In an effort to salvage certain individual and business tax breaks that expired or are about to expire, Congress has passed the Working Families Tax Relief Act of 2004 (WFTRA). The new law contains some $146 billion in tax reductions and ensures that some popular middle-class tax breaks will continue through 2010.

The new law also provides for a number of extended tax breaks for business, as well as some tax “simplifications.” We summarize some of the more important changes — and how they might affect you — below.

Child Tax Credit 

The child tax credit allowed for each qualifying child under age 17 is $1,000 for 2004. However, the credit was supposed to decline to $700 for 2005-2008, and then increase to $800 for 2009 and $1,000 for 2010. Due to a “sunset provision” in prior law, the credit is scheduled to revert to $500 for 2011 and beyond. (This sunset rule affects many of the other provisions we are discussing.) The credit is reduced when income exceeds certain levels (e.g., $110,000 for joint filers, $75,000 for unmarried filers). For low-income taxpayers, the child tax credit is refundable, within limits.

WFTRA increases the child tax credit to $1,000 for years 2005 through 2009. Therefore, the credit remains at $1,000 through 2010. Absent a further law change, the credit will still revert to $500 in 2011. The new law also liberalizes the provision allowing the refunding of the child tax credit for 2004.

The new law is welcome news for those taxpayers who will qualify for the child tax credit in 2005 through 2009.

Marriage Penalty Relief 

The marriage penalty is the quirk in the tax law that often has two single people paying less tax than married-joint filers earning the same incomes.

Efforts to eliminate the marriage penalty in 2001 and 2003 required the basic standard deduction (used by those who do not itemize deductions on their tax returns) for a joint-filer couple to be 200% of that of a single filer. However, due to budgetary constraints, the 2003 law called for dropping that percentage to 174% for 2005, with the percentage gradually rising back until it once again reached 200% for 2009 and 2010.

For tax years 2005 through 2008, WFTRA increases the standard deduction amount for joint filers to 200% of the single-filer standard deduction.

Thus, the joint-filer standard deduction will remain 200% of the single-filer deduction through 2010. As additional marriage penalty relief, the 2003 law established the end point of the 15% tax bracket for married-joint filers for 2004 to be 200% of the end point of the 15% bracket for a single return. However, for 2005, the joint-filer end point percentage was scheduled to drop to 180%, gradually rising in 2006 and later until it once again reached 200% for 2008 through 2010.

WFTRA provides that, for years 2005 through 2007, the end point of the joint-filer 15% bracket will be 200% of the single-filer end point. So, for 2005 through 2010, the 15% end point for joint filers will be 200% of that for a single filer.

10% Tax Bracket 

After 2004, prior tax law required that the 10% tax bracket amounts be reduced, so that individuals would pay less tax at a 10% rate, and more tax at the 15% or higher tax rates. The reduction would have applied for 2005 through 2007.

The new law repeals the scheduled reduction in the 10% bracket amounts for 2005 through 2007. For 2005, the 10% bracket will apply to the first $7,300 of taxable income (for single filers and married couples filing separately), $14,600 (for joint filers), and $10,450 (for heads of household), to be adjusted for inflation for 2006 through 2010. Almost all taxpayers gain some benefit from the higher 10% bracket amount.

AMT Exemption 

The alternative minimum tax (AMT) is intended to prevent taxpayers with large deductions and credits from avoiding income taxes altogether. In computing the AMT, individuals are entitled to an exemption amount (which phases out at higher income levels).

The exemption amount in 2004 is $58,000 for joint filers, $40,250 for unmarried filers, and $29,000 for married persons filing separate returns. After 2004, the AMT exemption was scheduled to decrease to $45,000 for joint filers, $33,750 for unmarried filers, and $22,500 for married-separate filers.

WFTRA repeals the scheduled 2005 reductions and keeps the 2004 exemptions in place for 2005. After 2005, the reductions go into effect.

Research Credit 

The tax law provides a research credit for part of the qualified research expenses paid by a business. The credit no longer applied to research expenses paid or incurred after June 30, 2004.

The new law resurrects the research credit for amounts paid or incurred after June 30, 2004, and before 2006.

Work Opportunity Tax Credit and Welfare to Work Credit 

These credits are incentives given to employers to hire disadvantaged workers in certain targeted groups and those who are long-term family assistance recipients. Both credits expired with respect to individuals who began work after 2003.

Under WFTRA, both credits are extended to wages paid to qualifying individuals beginning work after 2003 and before 2006.

Other Credits 

Other tax credits affected by the new law include: Credit for Qualified Electric Vehicles. The scheduled phasing down of this credit for vehicles placed in service in 2004 and 2005 is repealed.

Credit for Producing Electricity from Renewable Resources. This credit, repealed for facilities placed in service after 2003, is extended to facilities placed in service after 2003 and before 2006.

Other Business Provisions 

The new law also addresses these business tax provisions:

Elective Expensing of Qualified Environmental Remediation Costs. For qualifying remediation expenses paid or incurred through 2003, a taxpayer could elect to deduct the expenses, rather than capitalize them. WFTRA extends the election to expenses paid or incurred after 2003 and before 2006.

Enhanced Deduction for Qualified Computer Donations. The enhanced deduction allowed to regular C corporations for donating qualifying computer technology and equipment to an educational institution or public library, which ended after 2003, is extended for contributions made in tax years beginning after 2003 and before 2006.

Teachers’ Expense Deduction 

Before 2004, eligible K-12 teachers could claim a tax deduction for up to $250 of expenses for books, supplies, computer equipment, etc., they bought and used in the classroom. The deduction could be taken even if the teacher did not itemize deductions on her/his tax return. The new law extends the deduction for tax years beginning during 2004 or 2005.

We Can Help 

For many individual and business taxpayers, the changes made by WFTRA will mean additional dollars in their pockets over the next few years. Of course, this summary only touches the surface of the new law’s provisions, and before acting on any of these changes you should talk to us. We’d be happy to explain what the changes mean to you or your business. Please let us know if we can be of assistance.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.