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.
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.
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.
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.