On September 23, 2004, Congress passed the Working Families Tax Relief Act of 2004 (H.R 1308). The President is expected to sign this bill shortly. In addition to affecting "working families," the Act extends numerous expiring individual and business-related provisions; makes "technical" (and occasionally substantive) corrections to tax legislation as far back as the Small Business Jobs Protection Act of 1996; and includes some new proposals. One important business-related provision is the retroactive (and reportedly "seamless") extension of the research and development credit that expired June 30, 2004.

Long-Sought 'Uniform Definition of Child' Enacted

The Act includes an important simplification measure that includes a uniform definition of a child. The new, uniform definition applies for purposes of (1) the dependency exemption; (2) the child credit; (3) the earned income tax credit (EITC); (4) the dependent care credit; and (5) head-of-household filing status. In general, a child is a "qualifying child" of a taxpayer if the child: (1) has the same principal residence as the taxpayer for more than one half the tax year; (2) has a specified relationship to the taxpayer; and (3) has not yet attained a specified age. The current support and gross income tests for determining whether an individual is a dependent generally do not apply to a child who meets the uniform definition of qualifying child.

Extensions/ Expansions of Popular Tax Benefits:

Extends Marriage Penalty Relief, Child Tax Credit Through 2010

• Marriage penalty relief is extended until 2010
• The expanded 10% income tax bracket is extended until 2010
• The $1,000 child tax credit is extended to 2010, and the higher 15% refundability rate is accelerated to the beginning of 2004

Assistance to Military Families

• Increases the child credit for military families by allowing them to include tax-free combat pay when calculating their refundable child credit
• Increases the EITC for military families in 2004 and 2005 by giving them the option to include combat pay when calculating the EITC

Extends AMT Relief Through 2005

• The $58,000 AMT exemption amount for married couples is extended for one year (through 2005)
• The $40,250 AMT exemption amount for single individuals is extended for one year (through 2005)

Extends Expiring Individual and Business Provisions Through 2005

Individual-Related:

• $250 deduction for teacher classroom expenses
• Allows nonrefundable tax credits against the AMT
• Archer Medical Savings Accounts (MSAs)
• Repeal of the phase-out credit for electric vehicles and clean-fuel vehicles

Business-Related:

• Research and development tax credit
• Mental health parity
• Enhanced deduction for computer donations
• Work Opportunity Tax Credit and Welfare-to-Work tax credit
• Combined employment tax reporting demonstration project
• Higher limit on the cover over of rum excise taxes to Puerto Rico and the Virgin Islands
• Expensing of "Brownfields" environmental remediation costs
• Tax credit for electricity produced from renewable sources
• Suspension of 100 percent of taxable income limit with respect to marginal production
• Indian employment tax credit
• Accelerated depreciation for business property on Indian reservations
• Qualified Zone Academy Bonds
• Authority to issue New York Liberty Zone bonds (extended through 2009)
• Advance refunding of Liberty Zone bonds
• Tax incentives for investment in the District of Columbia

Disclosure Changes