Working Families Relief Act of 2004 Extends Many Expiring Tax Provisions

On October 4, 2004, the Working Families Tax Relief Act of 2004 was signed into law by President Bush.   The bill contains tax relief amounting to $132 billion for individuals and $14 billion for businesses by extending various provisions scheduled to expire on December 31, 2004.

The new law extends expiring provisions that originated with the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.   A summary of those provisions is as follows:

Impact on Individual Taxpayers

•  The $1,000-per-child tax credit is now effective through 2010.   This credit was scheduled to drop to $700 in 2005.

•  The definition of a child has been simplified and made consistent throughout the Tax Code for purposes of the dependency exemption, child credit, earned income tax credit, dependent care credit, and head-of-household filing status.

•  Low-income families may now receive a refund of 15% of the child tax credit, even if they have no tax liability for the year.   Previously, the refundable portion of the credit was only 10%.

•  The expanded 10% tax bracket is now effective through 2010.

•  Marriage penalty relief is extended through 2010 by keeping the standard deduction for joint filers at twice that of single taxpayers and preserving the 15% bracket expansions.

•  Higher exemption amounts for alternative minimum tax (AMT) are extended through 2005, giving Congress one more year to address the problem of millions of unintended taxpayers being subjected to AMT.

•  Various personal tax credits for AMT, originally expiring in 2003, have been extended through 2005.

•  Tax relief is included for active military families by allowing these taxpayers to include tax-free combat pay in calculations that determine the amount of child tax credits and earned income credits available to them.

•  The above-the-line deduction available to teachers for classroom expenses is extended through 2005.

Impact on Businesses

•  The research and development tax credit is extended for amounts paid or incurred between June 30, 2004, and December 31, 2005.

•  The welfare-to-work and work opportunity tax credits are extended for wages paid or incurred for individuals beginning work after 2003 and before 2006.

•  The enhanced deduction for charitable contributions of qualified computers, available to some corporations, is extended for donations made in tax years beginning after December 31, 2003, and before December 31, 2005.

•  The treatment of expensing environmental remediation costs is extended for expenses paid or incurred after 2003 and before 2006.

•  The credit for qualified electric vehicles and the deduction for qualified clean fuel vehicles are allowed for vehicles placed in service before 2006.

•  Contributions to Archer Medical Savings Accounts (MSAs) are extended through 2005.

•  Various provisions were also extended for energy producing facilities, marginal wells, Native Americans, District of Columbia and New York City residents, District of Columbia investors, and other specific taxpayers.

Although the new bill provides some short-term relief for many taxpayers, it does not address other provisions scheduled to expire soon, such as the reduced capital gains and dividend tax rates, the increased Section 179 expensing limitations, and the 50% bonus depreciation.  

The current capital gains tax rate of 15% is scheduled to return to 20% after 2008.   In addition, the tax rate on dividend income will revert from the current rate of 15% to the taxpayer's ordinary income tax rate after 2008.

In regard to the depreciation of fixed assets, the current Section 179 expensing limit of $100,000 returns to $25,000 after 2005.   Additionally, 2004 is the final year for the 50% bonus depreciation, since it was originally intended as a short-term economic stimulator after the 9-11 attacks.

The capital gains tax rates and Section 179 limitations are likely to be addressed soon.   However, the Bush Administration maintains that bonus depreciation served its purpose, and will not be extended.