Tax Relief, Chapter 2004: Tips for Implementing the New Rules
EXECUTIVE SUMMARY * THE WORKING FAMILIES TAX RELIEF ACT OF 2004 extends the alternative minimum tax exemption of $58,000 (married filing jointly) and $40,250 (single) through 2005. * THE WFTRA PROVIDES A UNIFORM DEFINITION OF "qualified child" that applies for purposes of head-of-household filing status, the child care credit, the dependency exemption and the earned income credit. * IN ELIMINATING THE EXTRATERRITORIAL INCOME exclusion for certain export receipts, the American Jobs Creation Act of 2004 implements a new manufacturer's deduction. The deduction, phased in over six years, essentially reduces the maximum manufacturing income tax rate to 31.85% for domestic corporations. * THE AJCA OFFERS AN ITEMIZED DEDUCTION for state sales tax to individuals living in states that do not levy a state income tax. The deduction also is allowed for taxpayers in states that do levy an income tax to the extent of the greater of the state sales tax amount or state and local income taxes paid. * CPAs SHOULD ENCOURAGE CLIENTS TO GIVE SPECIAL attention to the extended increases in section 179 immediate expensing and accelerated cost recovery allowances for leasehold improvements. ********** Two new tax laws have serious implications for taxpayers and carry an assortment of effective dates that will keep tax practitioners on their toes. Intending to stimulate the economy and create new jobs, Congress passed the Working Families Tax Relief Act (WFTRA) and the American Jobs Creation Act (AJCA) in 2004. This article describes their major provisions and offers planning tips to help CPAs get maximum advantage for their clients and employers. WORKING FAMILIES TAX RELIEF ACT OF 2004 Known as the Extender Act, WFTRA continues tax cuts from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The most important provisions are as follows: Tax brackets. The WFTRA extends the current 10% tax bracket for married filing jointly (MFJ) and single taxpayers, the expanded 15% MFJ tax bracket and the MFJ standard deduction designed to eliminate previously existing marriage penalties. Bracket ranges for both the 15% MFJ tax rate and the MFJ standard deduction remain twice that allowed for single taxpayers. Although they were originally scheduled to expire beginning in 2005, these tax breaks now continue through 2010. Child tax credit. Originally scheduled to revert to $700 in 2005, the child tax credit now will remain at $1,000 through 2010; in 2011, it will revert to $500. The credit is available only to taxpayers able to claim the dependency exemption, so it is of particular importance in the event of a divorce. Planning tip. Accountants advising clients on the tax implications of a divorce should address in settlement negotiations the issue of who will claim the dependency exemption and child tax credit. Alternative minimum tax. EGTRRA and JGTRRA tax cuts threatened to make many new taxpayers subject to the alternative minimum tax (AMT). To address this unintended pitfall, the AMT exemption was raised to $58,000 (MFJ) and $40,250 (single) from $49,000 (MFJ) and $35,750 (single) through 2004. The WFTRA extends the increased exemption amounts one year, through 2005, to allow Congress time to reengineer the AMT system. In 2006 the AMT exemption will revert to $45,000 (MFJ) and $33,750 (single). Planning tip. Examine items that might affect the triggering of AMT in 2005 or 2006, such as deductions for local income tax, sales tax and property tax: capital gains; qualified dividends; accelerated depreciation; and tax-exempt income. A taxpayer may want to shift income and/or deductions between years because of the higher AMT exemption in 2005. Taxpayers not subject to AMT in 2005 may consider paying property taxes during that year to prevent a lower, albeit insufficient, exemption amount--resulting in AMT--in 2006. …