Articles

The Working Families Tax Relief Act of 2004

Dina M. Russell, JD, LLM, CPA

Printed with permission of Society of Financial Service Professionals

On October 4, 2004, President Bush signed into law the Working Families Tax Relief Act (WFTRA) of 2004, P.L. 108-311 (H.R. 1308), a $146 billion tax package of "middle-class" tax benefits. With a primary focus on relief for mar­ried taxpayers with children, the WFTRA extends through 2010 several individual tax cuts that were originally due to expire at the end of 2004, retroac­tively extends through 2005 several busi­ness tax provisions that had generally expired at the end of 2003, and addresses several tax provisions that needed tech­nical correction. The purpose of this article is to highlight some of the major provisions in WFTRA as they affect individual taxpayers.

Accelerated Tax Cuts

Increased 10 Percent Rate Bracket Extended. Under prior law, the increased 10 percent rate bracket applied to the first $7,000 of taxable income for unmarried individuals and married taxpayers filing separately and to the first $14,000 of taxable income of married individuals fil­ing joint returns and sur­viving spouses for tax years 2003, 2004, 2008, 2009, and 2010.   Under WFTRA, effec­tive for taxable years beginning after December 31, 2003, the new law makes the increased 10 per-cent rate bracket applicable to tax years 2005 through 2007. Thus, for tax years 2005 through 2010, the 10 percent rate bracket applies to the first $7,000 of taxable income for unmarried individu­als and married individuals filing separately and to the first $14,000 of taxable income of married individuals filing joint returns and surviving spous­es. The extension of the 10 percent rate bracket has no effect on head of house-hold filers.

The 10 percent rate bracket will be adjusted for inflation in tax years beginning after 2003. For 2004, it applies to the first $7,150 of taxable income for single individuals (other than surviving spouses and heads of household) and married couples filing separate returns and to the first $14,300 of taxable income for married couples filing joint returns and surviving spous­es. For heads of household, taxable income subject to the 10 percent rate bracket is $10,200.

Marriage Penalty Relief in Standard Deduction Extended. Under prior law, the basic standard deduction amount for married taxpayers filing joint returns and surviving spouses was increased to twice the size of the basic standard deduction amount for single filers for tax years beginning in 2003 and 2004. The phase-in percentages for later years were 174 percent for 2005, 184 percent for 2006, 187 percent for 2007, 190 percent for 2008, and 200 percent for 2009 and 2010.

Under WFTRA, effective for taxable years beginning after December 31, 2003, the size of the basic standard deduction amount for joint returns is increased to twice the size of the basic standard deduction for single returns for tax years 2005 through 2008. Thus, for tax years 2005 through 2010, the basic standard deduction amount for married taxpayers filing joint returns and surviving spouses is twice the basic standard deduction amount for single return filers.

Marriage Penalty Relief in 15 Percent Rate Bracket Extended. Under prior law, the amount of taxable income falling within the 15 percent rate bracket for married taxpayers filing joint returns was increased to twice the amount of taxable income falling within the 15 percent rate bracket for single return filers for tax years 2003 and 2004. The phase-in percentages for later years were 180 percent for 2005, 187 percent for 2006, 193 percent for 2007, and 200 percent for 2008 through 2010.

Under WFTRA, effective for taxable years beginning after December 31, 2003, the size of the 15 percent rate bracket for married taxpayers filing joint returns is increased to twice the size of the 15 per-cent rate bracket for single filers for tax years 2005 through 2007. Thus for tax years 2005 through 2010, the size of the 15 percent rate bracket for joint returns is twice the size of the 15 percent rate brack­et for single returns.

Child Tax Credit Extended and Modi­fied. Under prior law, the child tax cred­it was $1,000 per qualifying child for 2003 and 2004, $700 for 2005 through 2008, $800 for 2009, and $1,000 for 2010. The tax credit is available for each qualifying child who is under age 17 at the close of the calendar year.

Under WFTRA, effective for taxable years beginning after December 31, 2003, the amount of the child tax cred­it is increased to $1,000 per qualifying child for tax years 2005 through 2009.

Increase of Child Tax Credit Refund Accelerated. Under prior law, the child tax credit was refundable for 2004 to the extent of 10 percent of the taxpay­er's taxable earned income (which is taken into account in determining tax-able income) in excess of $10,750 (indexed for inflation). For tax years 2005 and later, the percentage increased to 15 percent.

Under WFTRA, effective for taxable years beginning after December 31, 2003, the increase in refundability of the child tax credit from 10 percent to 15 percent of the taxpayer's taxable earned income in excess of $10,750 is accelerat­ed to the beginning of 2004.

Uniform Definition of Child

Definition of Child Expanded. Under prior law, the term "child" was generally defined as the taxpayer's child or stepchild.

Under WFTRA, effective for taxable years beginning after December 31, 2004, the definition of "child" is expanded to include natural children, stepchildren, adopted children, and eli­gible foster children. A taxpayer's adopt­ed child is a child who has been legally adopted by the taxpayer or a child who has been lawfully placed with the tax-payer for legal adoption by the taxpayer. A taxpayer's eligible foster child is a child who has been placed with the tax-payer by an authorized agency or by a judgment, decree, or other order of any court of competent jurisdiction.

Uniform Definition of a Qualifying Child Established. Under prior law, the defini­tion of a "qualifying child" varied for pur­poses of the dependency exemption, the child tax credit, the earned income cred­it, the dependent care credit, and head of household filing status. Accordingly, a taxpayer was required to determine eligi­bility for each of these tax benefits sepa­rately, and qualification for the benefits under one provision did not necessarily qualify the taxpayer for the benefits under another provision.

Under WFTRA, a uniform definition of a "qualifying child" is established for purposes of the dependency exemption, the child tax credit, the earned income credit, the dependent care credit, and head of household filing status. Under the uniform definition, a child is a "qualifying child" if the child:

• has the same principal place of abode as the taxpayer for more than one-half of the taxable year
• has a specified relationship to the taxpayer (i.e., the child must he the taxpayer's child; or the taxpayer's sib-ling, including half-brothers and half-sisters, or step-sibling; or any descen­dant of any such relative)
• generally has not yet attained the age of 19, or 24 if the child is a full-time stu­dent as of the close of the calendar year is a citizen or resident of the United States or a citizen of Canada or Mexico
• does not provide more than one-half of his or her own support during the calendar year in which the taxpayer's tax year begins.

Note that under WFTRA, the gross income test is eliminated and the sup-port test is redefined from the require­ment that the child must have received more than one-half of his or her support from the taxpayer. Also, the age test varies depending upon the tax benefit involved. Tie-breaking rules apply if a child would be a quali­fying child with respect to two or more taxpayers and more than one individual claims a benefit with respect to that child.

Dina M. Russell, JD, LLM, CPA, is an attorney practicing with Kulzer & DiPado­va, P.A., based in Haddonfield, N.J. She earned her LLM in Taxation from Villanova University School of Law, her JD from Temple University School of Law, and her BA in accounting from Temple Universi­ty. Dina is a member of the Bars of the State of New Jersey and the Commonwealth of Pennsylvania. She is also a CPA in the Commonwealth of Pennsylvania and a member of the Camden County, N.J., Bar Association. You can contact Dina at 856-795-7744 or dmr@kulzerdipadova.com.

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