With some of the most popular tax breaks nearing extinction, Congress delivered a well-timed tax measure extending significant breaks for both businesses and individual taxpayers. Signed into law on Oct. 4, the Working Families Tax Relief Act (WFTRA) will benefit 94 million American taxpayers over the next 10 years at an estimated cost of $146 billion.
Several business credits that expired on Dec. 31, 2003 were in limbo for tax year 2004, but WFTRA renews them retroactively and extends them through 2005. Delivering $14 billion in tax breaks to businesses, WFTRA continues the following opportunities:
- The Research and Development (R&D) Tax Credit Â Extended through 2005, this credit offers incentives for businesses to boost their research, offering a 20 percent tax credit on increases of qualified R&D activities.
- The Welfare-to-Work and Work Opportunity Tax Credits Â The Welfare-to-Work (WtW) credit provides tax breaks to businesses who hire long-term family assistance recipients; it can be worth as much as $8,500 per qualified employee. The Work Opportunity Tax Credit (WOTC) applies to businesses that hire employees from nine target groups, such as Supplemental Social Security Income (SSI) recipients or residents of designated Empowerment Zones. It can be worth as much as $2,400 per employee. Both credits have been extended through 2005.
- Tax credits for electric and clean fuel vehicles, and for electricity produced from renewable sources. The new law allows buyers of electric or clean-fuel cars to claim credits on the purchase of qualified vehicles purchased in 2004 or 2005, and extends the credit for electricity produced from qualified renewable energy facilities placed in service before 2006.
- Archer Medical Savings Accounts (MSAs) – Through 2005, contributions may be made to Archer MSAs, which are increasingly being replaced by Health Savings Accounts (HSAs).
- Expensing of environmental remediation costs – Taxpayers may deduct certain environmental remediation expenditures in the year paid or incurred through 2005.
- Enhanced deductions for corporate donations of scientific property and computers - These deductions apply to qualified property donations made through 2005.
- Tax incentives for investments in the District of Columbia and the New York City “Liberty Zone” – WFTRA extends authority to issue New York Liberty Bonds through 2009, and advance refund bonds through 2005. The D.C. Zone designation and the tax-exempt financing incentives have been extended through 2005, including the 0 percent capital gains rate and the D.C. first-time homebuyer’s credit.
Personal tax savings:
In addition to extending key business incentives, WFTRA also brings a host of personal tax savings. Extending tax breaks legislated by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), WFTRA maintains the following opportunities for individual taxpayers and families:
- $1,000 Child Tax Credit through 2010 Â Parents with dependent children under age 17 are entitled to claim a tax credit of up to $1,000 through 2010, though the credit starts to phase out for filers with adjusted gross income (AGI) of more than $75,000 for singles and $110,000 for married filing jointly. WFTRA extends the $1,000 child tax credit through 2010. The credit had been scheduled to fall back to a maximum of $700 in 2005.
- Marriage penalty relief through 2010 Â WFTRA extends through 2010 “marriage penalty relief,” which looks to alleviate the tax burden on married couples filing jointly who might pay less tax as single filers. These provisions provide married couples with a standard deduction and 15 percent tax bracket that is twice the size of that for single taxpayers.
- Extension of the expanded 10 percent tax bracket through 2010 -The income cap for the 10 percent bracket in 2005 is $7,300 for single filers, and $14,600 for joint filers. The caps for this bracket were due to fall back to $6,000 and $12,000 in 2005, but under WFTRA, they will remain at the higher levels, with inflation indexing.
- AMT relief through 2005 Â The alternative minimum tax (AMT) is sometimes triggered when taxpayers claim substantial deductions. Because the AMT allows fewer deductions than the regular tax system, filers who fall under this alternative system usually end up owing higher amounts to the IRS. The 2003 Tax Act set the AMT exemptions at $58,000 for married couples and $40,250 for single people. These exemptions were due to be reduced to $45,000 and $33,750, respectively, but under WFTRA will remain at the higher levels through 2005.
Additional WFTRA provisions affecting families are the acceleration to 2004 of the increase from 10 percent to 15 percent refundability of the child credit for low-income families, and the inclusion of combat pay in earned income for purposes of the child tax credit and earned income tax credit. The new law also provides a uniform definition of “child” for the dependency exemption, child credit, earned income tax credit, dependent care credit, and head of household filing status.
As with most of the tax legislation over the past four years, the most attractive reform for both individuals and businesses is only temporary, which means that further legislation most likely looms on the horizon. You should consult with a professional tax advisor for guidance as to how these regulations impact your situation.
This column appears courtesy of Janet M. Washburn, Associate Financial Planner with the Coastal Wealth Management Group, an office of MetLife Financial Services. Ms. Washburn is a member of the National Association of Insurance and Financial Advisors and Financial Planning Association.