Working Families Tax Relief Act of 2004 - HR 1308

Passed Congressional Joint Committee - September 24, 2004
Signed by President Bush - October 4, 2004

Unless otherwise noted, the provisions of this bill are effective for taxable years beginning after December 31, 2004.

 

I.        Extension of Certain Expiring Provisions

Child Tax Credit - Increased the child tax credit to $1,000 for taxable years 2005-2009.

The conference agreement accelerates to 2004 the increase in refund ability of the child tax credit to 15 percent of the taxpayer's earned income in the excess of $10,750 (with indexing).  This provision applies to taxable years beginning after December 31, 2003.

All modifications to the child tax credit will sunset under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  This means that in 2010 the child tax credit falls to $500.

Combat pay that is otherwise excluded from gross income under §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 tax credit.  Effective for taxable years beginning after December 31, 2003.

Any taxpayer may elect to treat excludable combat pay as earned income for purposes of the earned income tax credit.  This provision is effective with respect to any taxable year ending after the date of enactment and before January 1, 2006.

Marriage Penalty Relief - The basic standard deduction for taxpayers filing a joint return is twice that (200 percent) of the basic standard deduction for single filers.  The provision is effective for taxable years 2004-2010.  The phase-out percentages enacted under EGTRRA for taxable years 2005-2008 have effectively been eliminated.

The size of the 15 percent rate bracket for joint filers is increased to twice that for single filers for taxable years 2005-2010.  The phase-out percentages enacted under EGTRRA for taxable years 2005-2007 have been eliminated.

Extension of 10 Percent Tax Bracket - The size of the 10 percent tax bracket is extended for 2005-2010.  The brackets up to the ceiling is as follows for 2005:
$7,301 - single & married filing seperately
$10,451 - head of household
$14,601 - married filing joint

Alternative Minimum Tax Exemption - For 2005, the exemption amounts are as follows:

$58,000 - married filing joint, qualifying widow(er)
$40,250 - unmarried taxpayers
$29,000 - married filing separately
$22,500 - estates and trusts

The exemption amount is phased out by an amount equal to 25 percent of the amount by which the individual's alternative minimum taxable income exceeds:

$150,000 - married filing joint, qualifying widow(er)
$112,000 - unmarried taxpayers
$75,000 - married filing separately, and estates and trusts

These amounts are not indexed for inflation

 

Exemption Amount Increased

The amount you can deduct for each exemption has increased from $3,100 in 2004 to $3,200 in 2005.

You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount.  The amount at which the phase-out begins depends on your filing status.  For 2005, the phase-out begins at:

$109,475 for married persons filing separately,
$145,950 for single individuals,
$182,450 for heads of household, and
$218,950 for married persons filing jointly and qualifying widow(er)s with dependent children.

Retirement Savings Plans

The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans.

Traditional individual retirement arrangement income limits.  If you have a traditional individual retirement arrangement and are covered by a retirement plan at work, the amount of income you can have and not be affected by the deduction phase-out increases.  The amounts vary depending on filing status.

Limit on elective deferrals.  The maximum amount of elective deferrals under a salary reduction agreement that can be contributed to a qualified plan increases to $13,000 ($16,000 if you are age 50 or over).  However for SIMPLE plans, the amount increases to $9,000 ($10,500 if you are age 50 or over).

Standard Deduction Amount Increased

The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2004 than it was for 2003.  The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.

The basic standard deduction amounts for 2005 are:

$7,300 - Head of household
$10,000 - Married taxpayers filing jointly and qualifying widow(er)s
$5,000 - Married taxpayers filing separately
$5,000 - Single

Tuition and Fees Deduction

Beginning in 2004, the amount of qualified education expenses you can take into account in figuring your tuition and fees deduction increases from $3,000 to $4,000 if your modified adjusted gross income (MAGI) is not more than $65,000 ($130,000 if you are married filing jointly).

If your MAGI is more than $65,000 ($130,000), but not more than $80,000 ($160,000 if you are married filing jointly), your maximum tuition fees deduction will be $2,000.

No tuition and fees deduction will be allowed if your MAGI is more than $80,000 ($160,000).

Summary

This summary will focus primarily on the tax changes affecting individual taxpayers and small business owners.

I. Individuals

Election to deduct state and local general sales taxes in lieu of state and local income taxes – For tax years beginning after 2003 and before 2006, individual taxpayers may now elect to deduct either state and local income taxes or state and local general sales taxes as an itemized deduction on their federal income tax returns. The amount to be deducted is either:

  1. 1. The total of actual general sales taxes paid as substantiated by accumulated receipts, or
  2. 2. An amount from IRS-generated tables plus, if any, the amount of general sales taxes paid in the purchase of a motor vehicle, boat, or other items prescribed by the Secretary.

The deduction is subject to the phase-out limitation on itemized deductions for taxpayers with adjusted gross income over specified amounts.

State and local income taxes are an alternative minimum tax (AMT) adjustment to the alternative minimum taxable income (AMTI). Since taxpayers are electing to substitute state and local general sales taxes for state and local income taxes, and since new §164(b)(5) is silent regarding AMT, it is assumed that if the deduction for general sales taxes is elected, this amount will need to be added back to adjusted gross income to determine AMTI. Taxpayers in states with no state wide income tax (Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) who elect to deduct the general sales taxes paid may now become subject to AMT. These provisions are effective for tax years beginning after December 31, 2003.


II. Charitable Contributions

Substantiating vehicle donations – The reporting requirements for charitable contributions of most vehicles have been increased. A charitable deduction under §170(a) will be denied to any taxpayer that fails to obtain a written acknowledgement for any "qualified vehicle" donation if the claimed value of the vehicle exceeds $500. Once the claimed value of the vehicle donation exceeds $500, the new substantiation requirements replace the substantiation requirements that apply to contributions with claimed values of $250 or more.

For this purpose, a "qualified vehicle" includes any:

  1. 1. Motor vehicle that is manufactured primarily for use on public streets, roads, or highways;
  2. 2. Boat; or
  3. 3. Aircraft

The term "qualified vehicle" does not include any inventory property.

The written acknowledgement must be provided to the donor by the donee organization within 30 days of the contribution of the qualified vehicle, or the date

of sale of the qualified vehicle by the donee organization if it sells the vehicle without any significant intervening use or material improvement. The acknowledgement must contain the name and taxpayer identification number of the donor and the vehicle identification (or similar) number. It must also include: 1 - If the donee organization sells the qualified vehicle without any significant intervening use or material improvement:

  1. • A certification that the vehicle was sold in an arm's-length transaction between unrelated parties;
  2. • The gross proceeds of the sale; and
  3. • A statement that the deductible amount may not exceed the gross proceeds, or

2 - If the donee organization retains the qualified vehicle for its usage:

  1. • A certification stating the intended use of the vehicle or any material improvement intended for the vehicle, and the intended duration of such use; and
  2. • A certification that the vehicle will not be transferred in exchange for money, property,or services prior to completion of the intended use or improvement.

If the donee organization sells the qualified vehicle without any significant intervening use or material improvement, the maximum deduction the taxpayer will be allowed under §170(a) will be equal to the gross proceeds received by the donee organization from the sale of that qualified vehicle.

These amendments are applicable to contributions made after December 31, 2004.