Press12-01-2004 Aldridge, Borden & Company, P.C. In addition to the never ending stream of political ads and media coverage, there was another way to tell it was an election year and that there was an incumbent Republican president and Congress. Less than a month before election day, Congress passed and the President signed two tax acts; the Working Families Tax Relief Act of 2004 (the "Working Families Act") and the American Jobs Creation Act of 2004 (the "Jobs Act"). Unlike many tax acts that interest only CPAs and tax attorneys, both of these Acts will have an effect on all taxpaying Americans. Since the Jobs Act is 650 pages in length and the Working Families Act is 71 pages, this article provides only a few highlights of the most broadly reaching changes. Deduction of State and Local Sales Taxes in Lieu of State and Local Income Taxes For 2004 and 2005, taxpayers may deduct, as an itemized deduction on their personal tax return, state and local sales taxes paid in lieu of state and local income taxes paid. Individuals can either deduct the actual sales taxes paid or use an amount determined under IRS tables (which have not yet been created), plus any sales taxes paid with regard to the purchase of motor vehicles, boats and other similar items (to be determined by the IRS). Since we are so close to the end of 2004 and the sales tax deduction hasn't been allowed since 1986, it is unlikely many taxpayers have been saving their sales receipts during 2004. Therefore, most taxpayers will likely elect to use the IRS tables in 2004 to determine if the sales tax deduction is greater than the income tax deduction. According to the Jobs Act, the tables will be based on the average consumption by taxpayers on a state-by-state basis and will take into account taxpayers' filing status, number of dependents, adjusted gross income and various rates of state and local sales taxation. In states such as Florida and Texas, where there is no personal income tax, the Jobs Act will provide a huge new itemized deduction for many taxpayers. In Alabama, the benefit of this new deduction will depend largely on where our disposable income is spent (i.e., taxable purchases or non-taxable expenditures such as private school tuition) and whether we save more than we spend. Child Tax Credit Instead of creating new provisions, the Working Families Act accelerated and extended several provisions with which you may already be familiar. One of the more notable examples is the child tax credit. For 2004, married filing joint taxpayers with children under age 17, and adjusted gross income of less than $110,000, are allowed a $1,000 tax credit for each child (in 2003, many taxpayers received a $400 per child rebate check during the year and the remainder of the $1,000 credit on their 2003 tax return). Based on earlier legislation, the child tax credit was scheduled to be reduced to $700 for 2005 through 2008, and then increase to $800 in 2009, and $1,000 in 2010. The Working Families Act accelerates the increase to $1,000 in 2005, and keeps it at that level through 2010. Due to sunset provisions in earlier legislation, the credit is scheduled to be reduced back to $500 after 2010. Importantly, depending on taxable income levels, the child tax credit may be refundable (i.e., it may create a refund in excess of tax paid). Marriage Penalty Relief in the Standard Deduction and the 15% Income Tax Bracket For years taxpayers have complained that certain parts of the U.S. tax law favored single taxpayers and placed an unfair penalty on married taxpayers. In recent years, this inequality has garnered a lot of attention and Congress has worked to eliminate the inequity. For 2003 and 2004, Congress amended the law so that the standard deduction amount for married taxpayers who file a joint return will be double the standard deduction amount for single taxpayers. Congress also made the end point of the 15% rate bracket (i.e., the maximum taxable income subject to the 15% rate) for married taxpayers filing jointly double the endpoint of the 15% rate bracket for single taxpayers for 2003 and 2004. The Working Families Act makes these provisions applicable for 2005 through 2010. In 2011, due to sunset provisions in earlier legislation, the standard deduction and the endpoint of the 15% rate bracket for married taxpayers who file joint returns will be reduced to the pre-2003 tax act amounts and the marriage penalty will be effectively reinstated. 10% Rate Bracket Prior to the enactment of the Working Families Act, the end point of the 10% rate bracket was scheduled to be reduced to $12,000 beginning in 2005 for married taxpayers filing jointly. The Working Families Tax Act repealed that reduction in the end point, which will save most jointly filing couples at least $100 per year ($14,000 - $12,000 times 5% rate difference = $100 savings). The end point for the 10% rate bracket for jointly filing couples will be $14,000 of taxable income for 2004, and will be increased for inflation in years 2005 through 2010. Based on earlier legislation, after 2010, the 10% rate bracket will expire and the lowest tax rate will be 15%. Tax Break for School Teachers In 2003, school teachers were allowed to deduct from adjusted gross income up to $250 of expenses paid for books, supplies, computer equipment, and other materials used in the classroom. This deduction was allowed whether the teacher itemized deductions or used the standard deduction. The Working Families Act extended this deduction to 2004 and 2005. Deduction for Attorney Fees and Court Costs Involving Discrimination Suits Beginning with the date of enactment of the Jobs Act, individual taxpayers will be allowed to deduct from adjusted gross income, whether they itemize or take the standard deduction, all attorney fees and court costs paid in connection with a successful action involving a claim of unlawful discrimination. This deduction will be limited to the amount included in the taxpayer's gross income for the taxable year on account of the judgment or settlement (whether in lump sum or periodic payment). Important Business Provisions of the Legislation While this article is mainly concerned with the tax changes affecting individual taxpayers, it is important to note some of the more important changes created or extended that benefit businesses. The following is a list of some of the major tax changes affecting U.S. businesses:
The Shell Game Finally, you may be asking how Congress plans to pay for these new tax breaks. It is generally required that tax bills be revenue neutral for the federal government, or at least not increase the deficit past the ten year budget. The Working Families Act attempts to uphold this standard by keeping the sunset provisions enacted by the 2001 Economic Growth and Tax Relief Reconciliation Act. As discussed above, unless these provisions are extended or made permanent by future legislation, they will revert back to pre-2001 law. Instead of using sunset provisions, The Jobs Act went a step further in creating revenue increases by revising individual and corporate expatriation rules, clamping down on abusive tax shelters, reducing fuel tax evasion, extending expiring IRS user fees, increasing reporting for non-cash charitable contributions, and other provisions. Finally...planning and implementation The American Jobs Creation Act and the Working Families Tax Relief Act will offer tax savings to most U.S. taxpayers. However, careful planning is required to maximize the benefits available as a result of the Acts. You should contact your tax advisor to discuss any changes that may impact your specific tax situation. This article published in Montgomery Parents, December 2004, Volume 9 Number 12. |
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