2004 Working Families Tax Relief Act: selected highlights

California CPA, Nov, 2004 by Stuart R. Josephs

The following are selected highlights of the 2004 Working Families Tax Relief Act signed into law Oct. 4:

CHANGES AFFECTING INDIVIDUALS

Child Tax Credit

Under the existing law, for 2004, an individual may claim a $1,000 tax credit for each qualifying child under the age of 17. In general, a qualifying child is an individual for whom the taxpayers can claim a dependency exemption and who is the taxpayer's son or daughter (or descendent of either); stepson or step-daughter (or descendent of either); or eligible foster child.

Table 1 (above) shows the amount of the child tax credit that was scheduled under the old law for post-2004 years and the credit under the new law.

Refundability

Under the old law, for 2004, the child credit was refundable to the extent of 10 percent of the taxpayer's taxable earned income (which is taken into account in determining taxable income) in excess of $10,750 (indexed for inflation). This percentage is increased to 15 percent for tax years 2005 and thereafter.

The new law accelerates to 2004 the increase in refundability of the child credit to 15 percent of the taxpayer's earned income exceeding $10,750 (with indexing).

Combat Pay Treated as Earned Income

The new law provides that combat pay, otherwise excluded from gross income under IRC Sec. 112, is treated as earned income, which is taken into account in computing taxable income for purposes of calculating the refundable portion of the child credit. This new provision is effective for tax years beginning after 2003.

The new law also provides that any taxpayer may elect to treat combat pay, otherwise excluded from gross income under Sec. 112, as earned income for purposes of the earned income credit. This election is available for any tax year ending after Oct. 4, 2004 and before 2006.

Marriage Penalty Relief

Increased Basic Standard Deduction

Individuals who do not itemize deductions may choose the basic standard deduction, plus additional standard deductions if they are 65 years old or over or blind. The size of the basic standard deduction varies according to filing status and is adjusted annually for inflation.

For 2004, the basic standard deduction amounts are:

* $9,700 for married individuals filing joint returns;

* $4,850 for unmarried individuals;

* $4,850 for married individuals filing separate returns; and

* $7,150 for heads of households.

The following table shows the basic standard deduction for married couples filing joint returns, as a percentage of the standard deduction for unmarried individuals, that was scheduled under the old law for post-2004 years:

2005  174%
2006  184%
2007  187%
2008  190%
2009  200%
2010  200%

The new law increases the basic standard deduction for joint returns to twice the basic standard deduction for single returns, effective for 2005-08. Therefore, the basic standard deduction for joint returns will be twice the basic standard deduction for single returns for tax years 2004 through 2010.

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Caution: For tax years beginning after 2010, absent further legislation, the lower pre-2001 Tax Act statutory basic standard deduction dollar amount, adjusted annually for inflation, will apply to married couples filing joint returns.

Expanded 15-Percent Bracket For Married Couples Filing Joint Returns

Under the 2001 Tax Act, the 15 percent regular income tax rate bracket was increased for a married couple filing a joint return to twice the size of the corresponding bracket for an unmarried individual filing a single return. Before the 2001 Tax Act's effective date for this provision, the difference was 167 percent. This increased bracket was effective for tax years beginning after 2004, but was phased in over four years as follows:

Tax Year   Phase-in %

  2005        180%
  2006        187%
  2007        193%
2008-2010     200%

The 2003 Tax Act increased the size of the 15 percent regular income tax rate bracket for joint returns to twice the width of the 15 percent bracket for single returns for tax years beginning in 2003 and 2004.

The 2004 Tax Act increases the size of the 15 percent tax rate bracket for joint returns to twice the size of the corresponding tax rate bracket for single returns effective for 2005-2007. Therefore, the size of the 15 percent tax rate bracket for joint returns is twice the size of the corresponding tax rate bracket for single returns for tax years 2003 through 2010.

Caution: This increase in the 15 percent bracket for married couples filing joint returns will be repealed for tax years beginning after 2010, unless new legislation is enacted.

10 Percent Regular Income Tax Rate Bracket

For tax years beginning after 2000, the 2001 Tax Act created a new 10 percent bracket that applied to the following portions of taxable income:

* Single: first $6,000

* Heads of households: first $10,000

* Married filing jointly: first $12,000

For tax years beginning after 2008, the taxable income levels for the 10 percent bracket will be adjusted annually for inflation. This bracket will be rounded down to the nearest $50 for joint returns and head of household returns. The bracket for single individuals and married individuals filing separately will be one-half of the bracket for joint returns (after any inflation adjustment).