The Working Families Tax Relief Act of 2004 (WFTRA), a law extending a wide range of tax cuts, was passed by wide margins in both the House and Senate in September, and was signed by President Bush on October 4. The new legislation will cost some $146 billion over the next decade, and affect an estimated 94 million American taxpayers.Extensions of Tax Breaks for Families and Individuals
WFTRA provides for extensions of 2001 and 2003 tax cuts that have proven popular with American families. Together, these "family tax" provisions carry a 10-year price tag of $131.4 billion. They include:
- Extension of the $1,000 Child Tax Credit through 2010
Parents with dependent children under age 17 are entitled to claim a tax credit of up to $1,000 per child in 2005, though the credit starts to phase out for filers with adjusted gross income of more than $75,000 for singles and $110,000 for married filing jointly. WFTRA extends the $1,000 child tax credit through 2010. The credit had been scheduled to fall back to a maximum of $700 in 2005.
- Extension of marriage penalty relief through 2010
WFTRA extends through 2010 the so-called "marriage penalty relief." These provisions provide married couples with a standard deduction and 15% tax bracket that are twice the size of those for single taxpayers.
- Extension of the expanded 10% tax bracket through 2010
The income cap for the 10% bracket in 2005 is $7,300 for single filers, and $14,600 for joint filers. The caps for this bracket were due to fall back to $6,000 and $12,000 in 2005, but under WFTRA, they will remain at the higher level, with inflation indexing.
- AMT relief through 2005
The alternative minimum tax (AMT) is sometimes triggered when taxpayers claim substantial deductions. Because the AMT allows fewer deductions than the regular tax system, filers who fall under this alternative system usually end up owing higher amounts to the IRS. The 2003 Tax Act set the AMT exemptions at $58,000 for married couples and $40,250 for single people. These exemptions were due to be reduced to $45,000 and $33,750, respectively, but under WFTRA will remain at the higher levels through 2005.
Additionally WFTRA permits the inclusion of combat pay in earned income for purposes of the child tax credit and earned income tax credit. The new law also provides a uniform definition of "child" for the dependency exemption, child credit, earned income tax credit, dependent care credit, and head of household filing status.Tax Breaks for Businesses
The remainder of the tax cut package includes extensions—generally for one year—of provisions affecting businesses, many of which expired on December 31, 2003. The extended provisions include:
- Research and development tax credit
This credit would extend the current research tax credit to amounts paid or incurred after June 30, 2004, and before January 1, 2006.
- Tax credits for electricity produced from renewable sources, and electric and clean-fuel vehicles
The new law extends the credit for electricity produced from qualified renewable energy facilities placed in service before 2006, and allows buyers of electric or clean-fuel cars to claim credits on the purchase of qualified vehicles purchased in 2005.
- Work opportunity and welfare-to-work tax credits
These credits, which reward employers who hire economically disadvantaged workers, have been extended to cover wages paid or incurred for qualified individuals beginning work after December 31, 2003, and before December 31, 2005.
- Archer Medical Savings Accounts
Under WFTRA, Archer MSAs may continue to be established through 2005, or until the statutory limit for the number of accounts is met, whichever is earlier.
- Expensing of environmental remediation costs
The law allows taxpayers to treat certain environmental remediation expenditures as deductible in the year paid or incurred through December 31, 2005.
- Enhanced deduction for corporate donations of scientific property and computers
The law extends the deduction to contributions made in taxable years beginning before January 1, 2006.
The WFTRA extends authority to issue New York Liberty Bonds through 2009, and advance refund bonds through 2005. The D.C. Zone designation and the tax-exempt financing incentives have been extended through 2005.