Working Families Tax Relief Act: something for everyone

Don’t let the name fool you. The Working Families Tax Relief Act of 2004 provides tax benefits beyond the family unit to include single individuals and businesses.

Here are some of the highlights:

• The child credit, which was scheduled to drop, will stay at $1,000 through 2010. The 15 percent refundability percentage of the child credit also is accelerated so that it applies for tax years beginning after 2003 (instead of after 2004).

• For tax years beginning after 2004, the act establishes a uniform definition of a qualifying child for purposes of the dependency exemption, the child credit, the earned income credit, the dependent care credit and head of household filing status. Under the uniform definition, in general, a child is a qualifying child of a taxpayer if the child has the same principal place of abode as the taxpayer for more than half the taxable year, has a specified relationship to the taxpayer, has not yet attained a specified age and meets a support test.

• The provision setting the basic standard deduction for joint filers at twice that of single taxpayers, and the provision that increases the size of the 15 percent rate bracket for married couples filing joint returns — both of which were due to expire at the end of 2004 — are extended through 2010.

• The scheduled reduction in the amount of income subject to the 10 percent tax bracket is repealed, effective through 2010.

• The act also provides an additional $199 million of assistance to low-income military families in combat zones by increasing the child credit for families by allowing them to include tax-free combat pay when calculating their refundable child credit and increasing the earned income credit for military families in 2004 and 2005 by giving them the option to include combat pay when calculating the EIC.

• The alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount. In recent years, AMT taxpayers have enjoyed higher “exemption amounts” resulting in a reduced likelihood of AMT liability. This partial relief was set to expire in 2004 but has been extended temporarily to 2005.

• The act extends expiring business provisions through 2005 including: research and development tax credit; work opportunity and the welfare-to-work tax credits; deduction for a corporation’s qualified computer contributions; environmental remediation cost expensing; renewable-source energy credit; suspension of the marginal well net-income limitation; credit for qualified electric and clean fuel vehicles; teacher’s classroom expense deduction; and Contributions to Archer Medical Savings Accounts.

Since many of the provisions extend current benefits, the act should be viewed as preventing tax increases rather than actually cutting taxes. You may experience déjà vu next year when the provisions are set.

Denise Gearraughty is an attorney in the tax law practice at the McLane Law Firm, with offices in Manchester, Concord, and Portsmouth.