Please keep in mind that this covers only the highlights of the most important changes in the new law. Please consult your tax advisor for more details on how you may be affected, and whether immediate action is needed to take advantage of the tax breaks in this important tax legislation.
Family tax relief.
Child credit.
The child credit, which is $1,000 per child for
2004 but was scheduled to drop to $700 for 2005 through 2008 and to rise to $800
for 2009, will stay at $1,000 through 2010. Also, the 15% refundability
percentage of the child credit is accelerated so that it applies for tax years
beginning after 2003 (instead of after 2004).
Marriage penalty relief.
Two provisions that provide a measure of relief
from the marriage penalty are extended by the Act. The provision setting the
basic standard deduction for joint filers at twice that of single taxpayers, and
the provision that increases the size of the 15-percent rate bracket for married
couples filing joint returns, both of which were due to expire at the end of
2004, are extended through 2010.
10-percent bracket.
The scheduled reduction in the amount of income
subject to the 10% tax bracket is repealed, effective through 2010.
Extension of relief from the alternative minimum
tax (AMT).
Higher exemption amount extended.
In recent years, Congress has provided a measure of
relief from the AMT by raising the AMT "exemption amounts," thereby
reducing the likelihood of an AMT liability. However, this partial relief was
set to expire for tax years beginning after 2004, and the exemption amounts were
scheduled to revert to the lower amounts allowed under prior law. The Act
preserves this partial relief from the AMT by extending the higher exemption
amounts to 2005. Also, the availability of nonrefundable personal credits to
offset AMT has been extended through 2005 (instead of expiring after 2003 tax
years).
Uniform definition of child.
In a major tax simplification measure, the Act
replaces a series of different eligibility tests for child-related benefits with
a uniform definition of a child. For tax years beginning after 2004, the Act
establishes a uniform definition of a qualifying child for purposes of the
dependency exemption, the child credit, the earned income credit, the dependent
care credit, and head of household filing status. Under the uniform definition,
in general, a child is a qualifying child of a taxpayer if the child (1) has the
same principal place of abode as the taxpayer for more than one half the taxable
year; (2) has a specified relationship to the taxpayer; (3) has not yet attained
a specified age; and (4) meets a support test.
Assistance to military families in combat
zones.
The Act provides assistance to low-income military
families in combat zones by (1) increasing the child credit for families by
allowing them to include tax-free combat pay when calculating their refundable
child credit; and (2) increasing the earned income credit (EIC) for military
families in 2004 and 2005 by giving them the option to include combat pay when
calculating the EIC. These provisions are expected to provide an additional $199
million of assistance to military families in combat zones.