The Working Families Tax Relief Act of 2004, a $146 billion tax cut package, was passed by Congress on September 23. For the fourth time in four years Congress has enacted some big tax cuts. How much you’ll save in taxes depends on your filing status, family circumstances and business situation, and how you maximize benefits through careful planning. Timely tax planning can enhance these benefits.
The new law makes over 175 changes to the Tax Code, and is not only about relief to families, but provides tax relief to individuals and to businesses.
The new law extends two sets of expiring provisions: one for individuals and one for businesses. Without these extensions, individual taxpayers would pay a lot more in taxes in 2005 and subsequent years than in 2004. Business taxpayers receive even more immediate tax relief. The business tax breaks, which have been extended into 2005 by the new law, had already expired for the most part at the end of 2003.
Tax relief for individuals:
Parents of children under 17 can continue to claim a $1,000 child tax credit for every child through 2010. Without the new law, the child credit would have plummeted to $700 per child in 2005.
Married taxpayers filing jointly will continue to benefit from full marriage penalty relief. Through 2010, joint filers pay tax at double the single rate for the 15 percent rate and for the standard deduction. For 2005, this means having the high end of the 15 percent tax bracket pegged at $59,400 (rather than at $53,450) if Congress hadn’t passed the new law. The change in the new law in the standard deduction for married couples filing jointly is equally as dramatic $10,000 in 2005 instead of $8,700.
The 10 percent tax bracket’s upper limit for married taxpayers filing jointly stays at $14,000 ($14,600 inflation indexed) for 2005 rather than dropping to $12,000. For single taxpayers, it stays at $7,000 rather than dropping to $6,000.
The alternative minimum tax (AMT) exemption amount remains at $42,250 for single individuals and $58,000 for married couples for one more year. Taxpayers can also use the personal nonrefundable credits against AMT liability for one more year.
Tax relief for businesses:
The new law extends over 20 tax breaks for business taxpayers back to January 1, 2004 and forward to December 31, 2005. These tax breaks benefit almost every business.
Some of the more popular extensions apply to the research credit; work opportunity tax credit; welfare-to-work tax credit; qualified zone academy bonds; charitable contributions of computer technology and equipment used for educational purposes; classroom expenses of school teachers; expensing of environmental remediation costs; credit for electricity produced from certain renewable resources; suspension of the 100-percent-of-net-income limitation of percentage depletion; credit for qualified electric vehicles; deduction for qualified clean-fuel vehicle property; and Archer medical savings accounts.
The tax planning implications of the new law for individuals are as broad as the scope of the law itself. For example, individuals going through a divorce know that the right to claim the child tax credit is very valuable. For married couples who both work, and whose incomes are about equal, marriage penalty relief in the new law comes as a welcome perk for 2005. However, year-end strategies for accelerating or deferring income and doing the opposite for deductions remain critical for many couples since the marriage penalty is not eliminated in any of the tax bracket above the 15 percent bracket.
The tax breaks in the new law require most people to take a very close look at the AMT before the end of the year so that steps can be taken to reduce your AMT liability. You may be liable for AMT because the new law could reduce your regular tax liability and at the same time increase your AMT liability.
Businesses should evaluate each of the extended credits or deductions to determine if they qualify, such as the work opportunity credit, and if so, take steps to make sure they qualify in 2004 and or 2005. Businesses must not only evaluation of income and expenses, but also whether proper substantiation procedures are in place.