Presentation on theme: "Highlights of the Working Families Tax Relief Act of 2004 and American Jobs Creation Act of 2004."— Presentation transcript:
Highlights of the Working Families Tax Relief Act of 2004 and American Jobs Creation Act of 2004
Individuals Dependents –Separate dependency exemption tests currently apply Dependency exemption Head of household Child credit Earned income credit Dependent care credit
Individuals (Cont’d) Beginning in 2005, one set of dependency tests applies to the taxpayer’s qualifying children, and another set of tests applies to the taxpayer’s qualifying relatives.
Individuals (Cont’d) 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.
Individuals (Cont’d) Qualifying Child (Cont’d) Must be the taxpayer’s child, or a descendant of the taxpayer’s child (the taxpayer’s grandchild); or be the taxpayer’s brother or sister, or a descendant of the taxpayer’s brother or sister (the taxpayer’s niece or nephew, related by blood).
Individuals (Cont’d) 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).
Individuals (Cont’d) Qualified Relative (Cont’d) Must either be related to the taxpayer, or share the taxpayer’s home and be a member of the taxpayer’s household.
Individuals (Cont’d) 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
Individuals (Cont’d) 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
Individuals (Cont’d) Qualifying Individual 1.A dependent of the taxpayer under age 13 for whom the taxpayer is entitled to a dependency exemption 2.A dependent of the taxpayer who is physically or mentally incapable of caring for himself or herself 3.The spouse of the taxpayer, if the spouse is physically or mentally incapable of caring for himself or herself
Individuals (Cont’d) Beginning in 2005 1.The requirement that a taxpayer maintain a household in order to claim the dependent care credit is eliminated. 2.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
Individuals (Cont’d) Beginning in 2005 (Cont’d) 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.
Individuals (Cont’d) 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.
Individuals (Cont’d) 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
Individuals (Cont’d) 2005 Rate Schedule – Married Filing Jointly 2005 with new law2005 without new law 2005 taxable incometax rate2005 taxable incometax rate $0 - $14,60010%$0 – $12,00010% $14,601 - $59,40015%$12,001 - $53,45015% $59,401 - $119,95025%$53,541 - $119,95025% $119,951 - $182,80028%$119,951 - $182,80028% $182,801 - $326,45033%$182,801 - $326,45033% Over $326,45035%Over $326,45035%
Individuals (Cont’d) 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
Individuals (Cont’d) 10-Percent Tax Bracket Increases (Cont’d) Under prior law, these rates would have been adjusted for inflation only in 2004, 2009, and 2010. 10-percent bracket YearSingleMarried-Joint 2003 $7,000$14,000 2004$7,150$14,300 2005$7,200$14,600
Individuals (Cont’d) 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:
Individuals (Cont’d) Alternative Minimum Tax (AMT) Relief (Cont’d) $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.
Individuals (Cont’d) 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:
Individuals (Cont’d) Personal Tax Credits (Cont’d) 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.
Individuals (Cont’d) 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
Individuals (Cont’d) 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.
Individuals (Cont’d) 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.
Individuals (Cont’d) 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
Individuals (Cont’d) 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 donor’s deduction cannot exceed the amount the charity received for the car
Individuals (Cont’d) 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.
Individuals (Cont’d) 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.
Non-qualified Deferred Compensation What’s 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
Non-qualified Deferred Compensation What’s Changed (Cont’d) 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
Non-qualified Deferred Compensation What’s Changed (Cont’d) 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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