On October 4th, the President signed the Working Families Tax Relief Act of 2004 (Families Act). This is a $146 billion tax cut bill for both individuals and businesses that passed with wide majorities in both the House and Senate.  

Tax relief was provided primarily in four areas for individuals:

Individual Tax Relief

Business Tax Relief

Indeed, many of our clients may want to reassess any plans they may have had to postpone deductions into 2005 in anticipation of higher tax rates.  The Families Act was actually a compromise between lawmakers who wanted to make the prior tax cuts permanent and lawmakers who were concerned about the rising federal deficit.  

INDIVIDUAL TAX RELIEF

Child Tax Credit - The child tax credit, which was increased to $1,000 per child in 2001 and 2003 was set to revert back to $700 in 2005.  The Families Act extended the child tax credit to $1,000 all the way through 2010.  It is still set to expire in 2010 as are all of the tax cuts that were passed under the Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Act).  The $1,000 credit will not be indexed for inflation.

Expanded 10% Tax Bracket - Under the 2001 Act, the 10% tax bracket was established at $12,000 and $6,000 for joint and single returns respectively and would rise to $14,000 and $7,000 in 2008.  The Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Act) accelerated the higher bracket amounts to 2003 and 2004, but were to expire after that.  The Families Act continues the $14,000 and $7,000 amounts through 2010 and indexes them for inflation.  Individuals filing as head of household will retain $10,000 as his or her 10% bracket end point.

Marriage Penalty - The Families Act contained relief for both the 15% tax bracket and the standard deduction for joint returns.  The marriage penalty relief contained in the 2001 Act included a phased-in increase in the top end of the 15% tax bracket for joint returns over a 3 year period beginning in 2005.  The increase would equal double that of single taxpayers by 2008.  The 2003 Act accelerated that increase so that it took effect fully in 2003 and 2004.  The Families Act extended the accelerated benefit through 2010 when it is still set to expire.

The Families Act also extended the standard deduction relief that was passed and accelerated in 2001 and 2003.  Joint filers will continue to enjoy a standard deduction that is double that of single filers until at least 2010 when it is set to expire.

Alternative Minimum Tax Exemptions - Millions of taxpayers will soon begin paying the alternative minimum tax (AMT) because of the passage of the 2001 and 2003 Acts and the Families Act gives Congress one more year in which to address this problem.  The 2003 Act raised the AMT exemption to $40,250 and $58,000 for single and joint returns respectively, in 2003 and 2004 and the Families Act extends those exemption amounts for one more year.

Child Credit - The Families Act accelerates to 2004, the increase from 10% to 15% refundability of the child credit for low income families.

Combat Pay - The Families Act now includes combat pay into earned income for purposes of computing the refundable portion of the child tax credit and allows individuals to elect to treat combat pay as earned income for purposes of the earned income credit.

Teacher Classroom Expenses - The 2003 Act allowed teachers to deduct up to $250 of out-of-pocket classroom expenses "above-the-line" (meaning not subject to the 2% of AGI floor) and the Families Act extends that deduction through 2004 and 2005.  The deduction is available for K-12 teachers, instructors, counselors, principals and aides and had previously expired at the end of 2003.

Electric and Clean Fuel Vehicles - The credit available for electric and clean fuel vehicles was set to phase out in 2004 and 2005.  The Families Act repealed that phase out.

Archer Medical Savings Accounts - The provisions for Archer MSAs are extended through 2005.

Liberty Zone - The Liberty Zone incentives for New York City taxpayers devastated by the 9/11 terrorist attacks have been extended through 2009.

Definition of a Child - The Families Act provides a consistent definition throughout the Tax Code of a child for purposes of the dependency exemption, child credit, earned income credit, dependent care credit and head of household filing status. 

BUSINESS TAX RELIEF

Research and Development Tax Credit - The R&D credit has been extended for amounts paid or incurred between June 30, 2004 and December 31, 2005.  The credit had previously expired and the Families Act will reinstate the credit retroactively.

Work Credits - The welfare-to-work and work opportunity tax credits have been extended for wages paid or incurred for qualified individuals starting work after 2003 and before 2006.

Charitable Deduction For Computers - Donations of certain computer equipment to libraries and schools allows some corporations to deduct an amount in excess of the equipment's basis.  The Families Act extends that special deduction for equipment donated during tax years beginning after 2003 and before 2006.

Environmental Remediation Costs - Extended the expensing of these costs for 2004 and 2005.

Native Americans - Extended the accelerated depreciation for business property placed in service on reservations through 2005 and extended the Indian employment tax credit to tax years beginning prior to January 1, 2006.

Renewable-source Energy Credit - The credit is extended for facilities placed in service during 2004 and 2005.

Marginal-Well Net-Income Limitation - Extended for 2004 and 2005.

While not all of the provisions of the Families Act were merely extensions of prior tax cuts, most obviously were.  There were some technical corrections that are important only to tax practitioners and a few other minor and obscure tax provisions not listed here in the interest of brevity.   If you have any questions or concerns about provisions of the Families Act, please do not hesitate to contact our office.  We would be delighted to address any issues that may pertain to you.