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Congress Extends Popular Tax Breaks: Tax "Increase" Averted
(RIVERWOODS, ILL., September 23, 2004) – Congress has acted to extend the life of popular tax reductions that were due to expire at the end of this year, averting a tax "increase" for virtually all taxpayers, according to CCH INCORPORATED (CCH), a leading provider of tax and accounting law information and a Wolters Kluwer company. The Act also gives a reprieve to expiring business and special-interest tax breaks, tidies up the tax code and offers a further one-year "fix" on the alternative minimum tax.
The Working Families Tax Relief Act of 2004 extends the life of four popular "middle class" tax breaks. The child tax credit is extended at its current $1,000 per child level, the 10-percent income tax bracket will stay at its current level (adjusted for inflation) and two "marriage tax penalty relief" measures will not decrease next year.
"In effect, the Act smoothes out ups and downs in these tax benefits to keep them in effect at basically their current level through 2010," said CCH Principal Federal Tax Analyst Mark Luscombe, J.D., C.P.A.
Without the Act, the child credit was scheduled to decrease to $700 in 2005. The 10-percent bracket was scheduled to shrink to $12,000 for married couples filing jointly and $6,000 for single filers. Instead, the top of the brackets will stay at $14,000 and $7,000 respectively, adjusted for inflation since 2003, so taxpayers can expect the brackets to top out at $14,600 and $7,300, respectively, next year.
Married couples filing jointly would have taken two additional tax hits in 2005 if the legislation hadn’t passed. Their standard deduction would have been $8,700 next year, instead of the $10,000 they can expect due to inflation adjustment of their current $9,700 standard deduction. In addition, under prior law their 15-percent tax bracket would top out at $53,450 in 2005, rather than $59,400. That would have subjected nearly $6,000 more of their income to taxation at 25 percent rather than 15 percent. (See unofficial CCH projections of tax brackets and standard deductions for 2005, based on inflation figures released September 18, 2004, at cch.com/tax2004.)
Alternative Minimum Tax Relief Is Costly
The Act contains a one-year extension for individual alternative minimum tax (AMT) relief in the form of an expanded exemption and extends the ability to apply non-refundable personal credits against the alternative tax for 2004 and 2005. Many taxpayers would not have reaped the full benefits of the tax cuts that began in 2001 if it were not for a series of temporary "fixes" to the AMT. Because the AMT is not indexed for inflation, more and more taxpayers tend to become subject to its arduous provisions every year.
By raising the exemption used in calculating liability for the AMT, Congress has spared many taxpayers from having to pay the alternative tax and thus preserves for many people the full benefit of the tax reductions enacted in 2001 and 2003. What’s more, by raising the exemption for only a year or two at a time, Congress has kept to a minimum the cost of these fixes that must be taken into account for budget purposes.
"As much as many legislators would love to do away with the AMT entirely, the cost of doing that – measured in terms of lost revenue – is enormous," Luscombe said. "The single tax year of AMT relief in this bill will have a bigger impact in fiscal 2005 and 2006 than any other single provision."
The Act also contains a one-year extension of many expiring credits affecting businesses and a select number of individuals, including the research and development tax credit, the welfare-to-work and work opportunity tax credits, extension of Liberty Zone bonds for New York City and tax incentives for investment in the District of Columbia.
Extensions of provisions affecting a relatively small number of individuals include a credit for electric cars, deduction for clean-fuel vehicles and an above-the-line deduction for teacher classroom expenses.
Congress also used the Working Families Tax Relief Act of 2004 to tidy up some messy bits of the tax code. One major effort was to arrive at a unified definition of a "qualified child" for the purposes of the dependency exemption, the child credit, the earned income credit, the dependent care credit and head of household filing status. Each of these provisions has defined "child" somewhat differently in the past. Different provisions – notably, the child credit – will continue to use different ages as cut-offs in their definition of a "qualified child," but in general tests involving residency and relationship to the taxpayer will be the same across the board.
Some 25 pages of the Act are devoted to general clean-up, or "technical corrections" in tax law parlance. The Act revisits a number of tax laws going back to 1996, clarifying definitions and correcting paragraph references.
"It’s rare to get tax law absolutely perfect the first time around, so technical corrections are almost always to be expected," Luscombe noted.
About CCH INCORPORATED
CCH INCORPORATED (www.tax.cchgroup.com), based in Riverwoods, Ill., is a leading provider of tax and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. CCH is a Wolters Kluwer company (www.wolterskluwer.com).
Wolters Kluwer is a leading multinational publisher and information services company. The company's core markets are spread across the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2003) of €3.4 billion, employs approximately 18,750 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.
EDITOR’S NOTE: Copies of the CCH resources Tax Legislation 2004: Law, Explanation and Analysis of the Working Families Tax Relief Act of 2004, and Tax Legislation 2004: Conference Report of the Working Families Tax Relief Act of 2004 are available on a complimentary basis to reporters upon request. Contact Leslie Bonacum, 847-267-7153 or email@example.com; or Neil Allen, 847-267-2179, firstname.lastname@example.org