Working family tax relief act
The working families tax relief act of 2004, signed by President Bush, assures income tax cuts to middle-income families and offers more than 20 tax provisions related to businesses expired by the end of 2004. The important facts concerning the act are briefly looked into in the following paragraphs.
Child Tax Credit: According to the act, the child tax credit is retained to what was in 2004, for 2005 up to 2010. Before the act, it was scheduled to revert fro $1,000 to $700, then to rise by 2010 to $1,000 and then revert to$500, as per the act which was prevailing then.
The working families tax relief act also speeds up the rise in the ability of repayment of the childs credit to 15% of the income of the taxpayer which is more than $10,750 for 2004. It also gives taxpayers permission to include combat pay as their earned income for the purpose of determining of the repayable part of the child tax credit.
Standard Deduction and Tax brackets: The basic standard deduction for joint returns, which was to increase from 167% of that available to single taxpayers to 200% in 2009 and 2010, is being speeded up by the new act. The basic standard deduction for joint returns will be twice that for the single taxpayers from 2005 through 2010, to revert to 167% of the same after 2010.
The available bracket to joint filers was to rise from 167% to 200% of the width of the 15% of that available to single taxpayers for 2008 and 2010. According to the new act, the rise is accelerated to 200% of the width of the 15% of which available to single taxpayers from 2005 to 2010. The available bracket to the joint filers will return to 167% of the width of the 15% bracket that is permitted to single filers after 2010 based on the original sunset provisions.
Alternative Minimum Tax
Before the act was effected, the AMT exemptions that the individuals were qualified was $58,000 for jointly filing married couples, $22,500 for those filing separately, $40,250 for single persons and $33,750 for estates and trusts. These amounts were planned to sunset to those in 2000, after 2004. As per the tax relief act, the AMT exemption levels are extended to 2005 not extended into 2006, when it goes back to the 2000 levels.
Expenses of teachers: Allowablededuction up to $250 for selected expenses of the primary and secondary school teachers for 2002 and 2003, which was to expire in 2003, has been extended to 2004 and 2005.
Consistent definition of a qualifying child: The lack of a uniform definition of a qualifying child in the law that existed before has been rectified by the act which has put in place a consistent definition for dependency exemption purposes, child credit, head of family credit and dependent care credit.
In developing a uniform definition, the act requires tests for residency, relationship and age. If a child is wished to be claimed by more than one taxpaying individual, then there is a provision for a tie-breaking test. However, with the common definition, certain requirements such as the minimum earned income level remain the same as before. Taxpayers who meet the requirements under the old law can lay claim for the child as a dependent even if they fail to meet the criteria as per the new law.
To pass the residency test, the child should have resided in the taxpayers place of residence for more than half of the taxable year. The exemption allowed by the earlier law for situations such as education, vacation, military service, stays as per the new law as well.
To pass the relationship test, the child should be directly related to the taxpayer as his/her son or daughter, stepson or stepdaughter, or a descendant. A person who is lawfully adopted by the taxpayer or who is placed with the taxpayer by the concerned authority, will be treated as a child by blood of the taxpayer. Also, a foster child, placed with the taxpayer by a concerned legal authority will be treated as the child of the taxpayer.
Research Tax Credit
As per the new legislation, the research tax credits are extended to the specified amounts paid and received between the 30th June 2004 and 1st January 2006.
Work opportunity tax credit
This credit which provided employers usually with an elective tax credit for engaging persons from one or more of the total of 8 target groups, got extended to specified amounts paid and earned by the 31st of December, 2005.
Welfare-to-work Tax credit: The Welfare-to-work Tax credit which used to provide employers with an elective tax credit for engaging eligible long-term family assistance receivers from three targeted groups was extended to specified amounts paid and earned by the 31st of December, 2005.
Businesses: All businesses, whether small or big, benefit from the new act by receiving huge tax breaks. As a result of which, certain big companies which had claimed more than $4.3 billion as research & development credits and which were expecting an expansion of the research tax credit, got away with an extension.
Pros and cons of the act: There is of course very little scope for any disadvantages in the act because all the provisions in the act reduce the tax burden on the individuals. Also, the bill doesnt contain revenue offsets.
As for the advantages, the biggest gainers are the taxpayers who file jointly and have children younger than 17 years of age, as they enjoy the gains of marriage penalty relief, the lower 10% bracket, child credit of $1,000 and if eligible for, exemption of higher AMT. among others to benefit are married taxpayers, those filing single and jointly, stand to benefit as long as they belong to the 10% bracket. They will be entitled for the 15% bracket in addition to the 15% tax bracket.
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