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Working Families Tax Relief Act of 2004
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On October 4, 2004, President Bush signed into law the "Working Families Tax Relief Act of 2004 (H.R. 1308)," which was passed by the House and Senate on September 23. It provides approximately $146 billion in tax breaks aimed primarily at middle-income taxpayers and all size businesses. Some major highlights of the new tax law are:
Below are details of most provisions of the new tax law: Extension of $1,000 Per Child Tax Credit The new law extends the maximum $1,000 per child tax credit through year 2010. The maximum credit reverts to $500 beginning January 1, 2011, under the EGTRRA sunset provision. The new law also accelerates to tax year 2004 the increase in refundability of the child tax credit to 15% of the taxpayer's earned income in excess of $10,750. Marriage Penalty Relief - Standard Deduction The new law provides for full marriage penalty relief for tax years 2005-2010 by increasing the basic standard deduction amount for joint-filer tax returns to DOUBLE the basic standard deduction amount for single tax returns. Marriage Penalty Relief - 15% Tax Bracket The new law provides for additional marriage penalty relief for taxable years 2005-2010 by increasing the size of the 15% rate bracket for joint-filer tax returns to DOUBLE the corresponding rate bracket for single tax returns. Expansion of the 10% Income Tax Bracket for Individuals The new law increases the size of the 10% rate bracket for individuals for taxable years 2005-2010 by setting the rate bracket for these years at 2003 levels ($7,000 for single, $10,000 for head of household, and $14,000 for married filing joint filers), with indexing. Extension of the Individual Alternative Minimum Tax (AMT) Relief The new law extends the increased alternative minimum tax exemption amounts for individual taxpayers through year 2005 ($58,000 for married filing joint and surviving spouses, $40,250 for single and head of household, $29,000 for married filing separate, and $22,500 for estates and trusts). Earned Income for Purposes of "Earned Income Credit (EIC)" and Refundable Child Tax Credit Includes Combat Pay For tax years 2004 and 2005, any taxpayer may ELECT to treat combat pay that is otherwise excluded from gross income as "earned income" for purposes of the Earned Income Credit (EIC). Individuals whose EIC would be increased should make this election. For tax years 2004 and 2005 combat pay that is otherwise excluded from gross income would be treated as earned income that is taken into account in computing taxable income for purposes of calculating the refundable portion of the child tax credit. Uniform Definition of "CHILD" for Tax Purposes The new law creates a uniform definition of a "qualifying child" for purposes of the:
Under the uniform definition, a child would be a "qualifying child" of the taxpayer if the child meets THREE tests:
Relationship - The child must be the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual. Foster children placed with the taxpayer by authorized placement agencies and legally adopted children (included those lawfully placed with the taxpayer for legal adoption) would satisfy the relationship test. Residence - The child must live with the taxpayer in the same principal place of abode in the United States for MORE THAN half the year. Military personnel on extended active duty outside the United States would be considered to be residing in the United States. The taxpayer and child are considered to live together even if one or both are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service. NOTE: Legally adopted children who are NOT citizens or residents of the United States may be a qualifying child if the child's principal place of abode is the taxpayer's home and the taxpayer is a U.S. citizen or national. Age for Dependency Exemption, Earned Income Credit, and Head of Household Filing Status - The child must be under age 19 (or under age 24 if a full-time student) on the last day of the tax year, or any age if totally and permanently disabled. Age for Child & Dependent Care Tax Credit - The child must be under age 13 at time care is provided (or any age if physically or mentally incapable of caring for himself or herself). Age for Child Tax Credit - The child must be under age 17 (whether of not disabled) on the last day of the tax year. What happens if a "qualifying child" is a qualifying child of MORE THAN one taxpayer? A "tiebreaker rule" will apply if more than one qualifying taxpayer claims a benefit for the same child. If a child may be a qualifying child with respect to more than one taxpayer and more than one person claims a benefit with respect to the child, then:
Modifications to Dependency Exemptions for Noncustodial Parents The new law modifies the structure of the custodial waiver rules under which a custodial parent may release the claim to a dependency exemption to a noncustodial parent. As modified, the waiver rules would provide that if a waiver is made, would apply for purposes of whether a child is a qualifying child, and therefore, such waiver would apply for the dependency exemption and the child tax credit (which requires that a dependency exemption be made for the child), but NOT for the earned income credit, head of household status, or dependent care credit. NOTES on New Law for Uniform Definition of Child If a child provides more than one half of his or her own support, then that child would NOT be considered a "qualifying child" (except for purposes of the earned income credit). The present law support and gross income tests for the dependency exemption would be inapplicable to a child that meets the uniform definition. If a married child files a joint return the uniform definition rules do NOT apply. Prior-law rules may be used instead. The prior-law rules are retained for individuals to whom the uniform definition does NOT apply. Extension of Twenty-Three Expiring Tax Provisions The following provisions have been extended:
Tax Technical Corrections Some technical corrections have been made to the:
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