The 2004 Tax Law

Politicians will call it a tax cut, but for the most part it maintains the status quo, preventing scheduled tax increases.

In October 2004 Congress stitched together a pre-election bonus for taxpayers in the form of something called the Working Families Tax Relief Act of 2004, known to tax pros (and dogs) as WFTRA. It's projected to add about $145 billion to the deficit our grandchildren will have to pay, but you probably won't notice that your taxes got any lower. That's because the main provisions of this law are aimed at preserving existing tax breaks, rather than creating new ones.

Semi-Permanent

Here are some items that are extended through the year 2010 under this law:

• The child credit stays at $1,000 per qualifying child under age 17, instead of dropping to a lower level.
• The standard deduction for couples filing jointly remains at double the standard deduction for singles.
• Likewise, the size of the 15% bracket for couples filing jointly remains double the number for singles.
• The size of the 10% bracket will remain the same (not go down, as scheduled).

Alternative Minimum Tax

WFTRA has a couple of provisions to protect taxpayers from the alternative minimum tax (AMT). The AMT exemption amount was scheduled to drop to a lower level next year. That would have thrown many more taxpayers into the AMT. Congress extended the current, higher levels of the AMT exemption amount through 2005. Why not longer? Because this is a budget busting item. Extending it just one year cost over $22 billion, and the later years are even more expensive. Congress will have to deal with this issue on a more comprehensive basis later, but we're protected (sort of) through 2005 for now.
    Congress also protected the "nonrefundable personal credits" from erosion under the AMT. These are things like the child credit and the child and dependent care credit. This relief applies to 2004 and 2005.
    There's also an interesting technical correction, having to do with a problem we've discussed on our message board. A glitch in the law prevented taxpayers in some situations from getting the benefit of the 5% tax bracket for capital gains. Strangely, taxpayers could see their tax liability go up when they qualified for larger deductions. The new law corrects the problem retroactively, which means you can apply for a refund if you were affected in prior years that remain open under the statute of limitations. Click here for more details.

Other Extensions

WFTRA also prevents various other provisions from expiring. This is a grab bag ranging from a credit for electric cars to expenses of elementary and secondary school teachers to Archer medical savings accounts. The biggest item in this category is the credit for research and experimentation (R&E credit), extended through 2005.

Qualifying Child

There's one other provision we cover separately. To make the law simpler and more fair, WFTRA adopts a uniform definition of "qualifying child" for purposes of the dependency exemption, the child credit, the earned income credit, the dependent care credit, and head of household filing status. Prior to this change, all these provisions had their own criteria for determining whether a taxpayer could treat a particular individual as a qualifying child. It makes a lot of sense to have a single rule here. Click here for more information about this change.