2004 Working Families Tax Relief Act: General Information

For the fourth time in four years Congress has enacted some big tax cuts. How much you’ll save in taxes depends on your filing status, family circumstances and business situation, and how you maximize benefits through careful planning. This letter will help you identify which parts of the new $146 billion tax cut package can benefit you. It also explains how timely tax planning can enhance these benefits. Especially now, as we enter the year-end tax planning season, the new tax law comes at an ideal time to cut your tax bill.

The new law provides tax relief to individuals and to businesses. Businesses especially should note that the title of the new law – the Working Families Tax Relief Act of 2004 – is misleading. The new law is not only about relief to families. As Congress often does, it started with a tax bill to increase just one tax provision, the child tax credit, and used the same bill to tack on many more tax cuts for a broad spectrum of taxpayers, from single filers to small businesses to global corporations. The new law makes over 175 changes to the Tax Code.

Overview

The new law extends two sets of expiring provisions: one for individuals and one for businesses. Without these extensions, individual taxpayers would be paying a lot more in taxes in 2005 and subsequent years than in 2004. Business taxpayers receive even more immediate tax relief. The business tax breaks, which have been extended into 2005 by the new law, had already expired for the most part at the end of 2003.

Tax relief for individuals
Here are the big changes for most individual taxpayers:

• Parents of children under 17 can continue to claim a $1,000 child tax credit – for every child through 2010. Without the new law, the child credit would have plummeted to $700 per child in 2005.
• Married taxpayers filing jointly will continue to benefit from full marriage penalty relief. Through 2010, joint filers pay tax at double the single rate for the 15 percent rate and for the standard deduction. For 2005, this means having the high end of the 15 percent tax bracket pegged at $59,400 (rather than at $53,450) if Congress hadn’t passed the new law. The change in the new law in the standard deduction for married couples filing jointly is equally as dramatic - $10,000 in 2005 instead of $8,700.
• The 10 percent tax bracket’s upper limit for married taxpayers filing jointly stays at $14,000 ($14,600 inflation indexed) for 2005 rather than dropping to $12,000. For single taxpayers, it stays at $7,000 rather than dropping to $6,000.
• The alternative minimum tax (AMT) exemption amount remains at $42,250 for single individuals and $58,000 for married couples for one more year. Taxpayers can also use the personal nonrefundable credits against AMT liability for one more year.

Tax relief for businesses:

The new law extends over 20 tax breaks for business taxpayers back to January 1, 2004 and forward to December 31, 2005. These tax breaks benefit almost every business.

Some of the more popular extensions apply to the research credit; work opportunity tax credit; welfare-to-work tax credit; qualified zone academy bonds; charitable contributions of computer technology and equipment used for educational purposes; classroom expenses of school teachers; expensing of environmental remediation costs; credit for electricity produced from certain renewable resources; suspension of the 100-percent-of-net-income limitation of percentage depletion; credit for qualified electric vehicles; deduction for qualified clean-fuel vehicle property; and Archer medical savings accounts.

Consequences

The tax planning implications of the new laws for individuals are as broad as the scope of the law itself. For example, individuals going through a divorce know that the right to claim the child tax credit is very valuable. For married couples whom both work, and whose incomes are about equal, marriage penalty relief in the new law comes as a welcome perk for 2005. However, year-end strategies for accelerating or deferring income and doing the opposite for deductions remain critical for many couples since the marriage penalty is not eliminated in any of the tax bracket above the 15 percent bracket.

Finally, on the individual tax planning side, the tax breaks in the new law require most people to take a very close look at the AMT. This is especially critical before the end of the year so that steps can be taken to reduce your AMT liability. You may be liable for AMT because the new law could reduce your regular tax liability and at the same time increase your liability for AMT.

Businesses have an easier time reacting to the new law. For each of the extended credits of deductions, businesses should evaluate if they qualify for any of the extended credits or deductions, such as the work opportunity credit, and then take steps to make sure they qualify in 2004, 2005 or in both years. These steps include not only evaluation of income and expenses, but also whether proper substantiation procedures are in place.

Whatever your circumstances, you’ll likely benefit from taking time to do some tax planning as the result of the new law. You should start planning now before the year ends and you can no longer change your taxable income, deductions and credits for 2004. Please don’t hesitate to call our office for more details about the new law and your personal income or business.