Highlights of the Working Families Tax Relief Act of 2004 and American Jobs Creation Act of 2004

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Highlights of the Working Families Tax Relief
Act of 2004andAmerican Jobs Creation Act of
2004
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Individuals

• Dependents Separate dependency exemption tests
  currently apply
• Dependency exemption
• Head of household
• Child credit
• Earned income credit
• Dependent care credit

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Individuals (Contd)

• Beginning in 2005, one set of dependency tests
  applies to the taxpayers qualifying children,
  and another set of tests applies to the
  taxpayers qualifying relatives.

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Individuals (Contd)

• Qualifying Child
• Must be under the age of 19 at the end of the
  year, or be a full-time student under the age of
  24.
• Must share a home with the taxpayer for more than
  half the tax year.
• Must not provide more than half of his or her own
  support.

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Individuals (Contd)

• Qualifying Child (Contd)
• Must be the taxpayers child, or a descendant of
  the taxpayers child (the taxpayers grandchild)
  or be the taxpayers brother or sister, or a
  descendant of the taxpayers brother or sister
  (the taxpayers niece or nephew, related by
  blood).

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Individuals (Contd)

• Qualified Relative
• Must receive at least one-half of total annual
  support from the taxpayer.
• Must not have gross income in excess of the
  annual exemption amount (3,100 in 2004, and
  projected by CCH to be 3,200 in 2005).

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Individuals (Contd)

• Qualified Relative (Contd)
• Must either be related to the taxpayer, or share
  the taxpayers home and be a member of the
  taxpayers household.

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Individuals (Contd)

• Child Tax Credit Increase Extended
• For a dependent child under age 17
• Current credit is 1,000 per child
• Was due to decrease to 700 in 2005
• New law will keep credit at 1,000 per child
  through 2010
• Modified AGI limits apply to high income taxpayers

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Individuals (Contd)

• Dependent Care Credit Modified
• Can be claimed by a taxpayer who maintains a
  household that includes one or more qualifying
  individuals and who has employment-related
  expenses

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Individuals (Contd)

• Qualifying Individual
• A dependent of the taxpayer under age 13 for whom
  the taxpayer is entitled to a dependency
  exemption
• A dependent of the taxpayer who is physically or
  mentally incapable of caring for himself or
  herself
• The spouse of the taxpayer, if the spouse is
  physically or mentally incapable of caring for
  himself or herself

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Individuals (Contd)

• Beginning in 2005
• The requirement that a taxpayer maintain a
  household in order to claim the dependent care
  credit is eliminated.
• If all other requirements are met, you may claim
  the dependent care credit with respect to a
  qualifying individual who lives with you for more
  than one-half of the year, even if you do not

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Individuals (Contd)

• Beginning in 2005 (Contd)
• provide more than one-half of the cost of
  maintaining the household. To be a qualifying
  individual for purposes of the dependent care
  credit, a disabled dependent or spouse of a
  taxpayer will have to have the same principal
  place of abode as the taxpayer for more than
  one-half of the tax year.

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Individuals (Contd)

• Marriage Penalty Relief in Standard Deduction and
  15 Tax Bracket
• Without the new law, the standard deduction for
  joint filers in 2005 would have been only 174 of
  the standard deduction for single filers.

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Individuals (Contd)

• Key Rates and Figures
• The 2005 basic standard deduction amounts, as
  projected by CCH under the new law, are as
  follows
• Married, filing jointly 10,000
• Surviving spouses 10,000
• Head of household 7,300
• Unmarried 5,000
• Married, filing separately 5,000

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Individuals (Contd)

• 2005 Rate Schedule Married Filing Jointly

2005 with new law 2005 with new law 2005 without new law 2005 without new law
2005 taxable income tax rate 2005 taxable income tax rate
0 - 14,600 10 0 12,000 10
14,601 - 59,400 15 12,001 - 53,450 15
59,401 - 119,950 25 53,541 - 119,950 25
119,951 - 182,800 28 119,951 - 182,800 28
182,801 - 326,450 33 182,801 - 326,450 33
Over 326,450 35 Over 326,450 35
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Individuals (Contd)

• 10-Percent Tax Bracket Increases
• Through 2010, the 10-percent tax bracket applies
  to the first 7,000 of taxable income for single
  filers and 14,000 for joint filers
• The 10-percent bracket will be adjusted for
  inflation in tax years beginning after 2003

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Individuals (Contd)

• 10-Percent Tax Bracket Increases (Contd)
• Under prior law, these rates would have been
  adjusted for inflation only in 2004, 2009, and
  2010.
• 10-percent bracket
• Year Single Married-Joint
• 2003 7,000 14,000
• 2004 7,150 14,300
• 2005 7,200 14,600

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Individuals (Contd)

• Alternative Minimum Tax (AMT) Relief
• Taxpayers subject to the alternative minimum tax
  will be relieved to know that the new law extends
  the higher alternative minimum tax (AMT)
  exemptions through 2005. The exemption amounts
  are

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Individuals (Contd)

• Alternative Minimum Tax (AMT) Relief (Contd)
• 58,000 for married individuals filing a joint
  return, and surviving spouses
• 40,250 for unmarried individuals and
• 29,000 for married individuals filing separate
  returns.

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Individuals (Contd)

• Personal Tax Credits
• The use of nonrefundable tax credits against
  regular and AMT tax has been extended for two
  more years.
• For 2004 and 2005, these credits are allowed in
  full

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Individuals (Contd)

• Personal Tax Credits (Contd)
• Dependent care credit
• Credit for elderly and disabled
• Adoption credit
• Part of the child tax credit
• Credit for interest on certain home mortgages
• Education credits and
• Savers credit.

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Individuals (Contd)

• Electric Vehicle Credit and Clean Fuels Tax
  Deduction
• If you purchase a qualified electric vehicle the
  tax credit is 10-percent of its cost to a maximum
  of 4,000
• The new law eliminated the phase-out that had
  been scheduled for 2004 and 2005

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Individuals (Contd)

• Electric Vehicle Credit and Clean Fuels Tax
  Deduction
• If you purchase a qualified clean-fuel vehicle
  you may be able to deduct up to 2,000 of the
  cost in 2004 and 2005.
• Under prior law, the deduction was scheduled to
  phase out for vehicles placed in services after
  2003.

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Individuals (Contd)

• State Sales Tax Deduction
• For 2004 and 2005, the new law allows the option
  of deducting state and local sales taxes or state
  and local income taxes.

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Individuals (Contd)

• Like-Kind Exchanges of Personal Residences
• An individual can exclude up to 500,000 of the
  gain on the sale of a personal residence if the
  home was owned for two (2) or more years.
• Under the new law, if you receive your home as a
  result of a like-kind exchange, the period of
  ownership is extended to five (5) years

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Individuals (Contd)

• Charitable Contributions of Cars/Other Vehicles
• Before new law, no qualified appraisal was
  necessary if fair market value was not over
  5,000
• Beginning in 2005
• If the value of the donated car is over 500, the
  taxpayer will be required to obtain written
  acknowledgement of how the car will be used.
• If the charity sells the car without using or
  improving it, the donors deduction cannot exceed
  the amount the charity received for the car

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Individuals (Contd)

• Military Families
• Combat pay is generally excluded from gross
  income
• Under new law
• Combat pay can be included when calculating the
  earned income credit for 2004 and 2005.
• Combat pay can be included for purposes of
  calculating the child tax credit in 2004 through
  2010.

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Individuals (Contd)

• Teachers
• The 250 above-the-line deduction for teaching
  supplies has been set to expire at December 31,
  2003.
• The new law has extended the deduction to 2004
  and 2005.

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Non-qualified Deferred Compensation Whats Changed

• New election timing rules
• Timing of elections to defer and re-defer
  compensation
• Timing of elections as to form of the payout
• New distribution restrictions no acceleration
  allowed
• No foreign rabbi trusts
• No funding triggers based on financial health
• Applicable to amounts deferred after 2004

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Non-qualified Deferred Compensation Whats
Changed (Contd)

• What is NQDC under the new law?
• Includes both elective and non-elective plans
• Applies to all types of service providers
• Includes SERPs, top-hat plans, excess benefit
  plans, phantom stock plans, and restricted stock
  units
• Stock appreciation rights (SARs)
• Discounted non-qualified stock options (NSOs)
• NSOs that have a deferral feature other than the
  right to exercise the option

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Non-qualified Deferred Compensation Whats
Changed (Contd)

• Implications if requirements not met
• NQDC will be taxed to the employee when there is
  no substantial risk of forfeiture
• Employee must pay interest at the underpayment
  rate plus 1 percentage point
• Employee will incur a 20 penalty on the amount
  required to be included in income

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QUESTIONS?

• For more details and updates, logon to
  www.macpas.com and subscribe to our email
  newsletter.
• Or Contact
• Kurt M. Trimarchi, CPA
• Director of Tax Services
• ktrimarchi_at_macpas.com