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Details on Family Tax Relief in the 2004 Working Families Act

The recently passed 2004 Working Families Act includes a package of tax breaks aimed primarily at middle-income taxpayers. Core elements of the new law include keeping the per child tax credit at $1,000 per child instead of letting it drop to $700 in 2005, continuing an expanded 10 percent income bracket that affects virtually all taxpayers, and retaining provisions to provide tax relief for married couples. Here are the details:

$1,000 child tax credit extended.

The child credit applies to each child who is under age 17 as of the end of the year. The child must be a U.S. citizen or resident and must be claimed as the taxpayer's dependent. Not everyone qualifies. Taxpayers with income over certain threshold levels cannot claim the credit. For 2004, the credit is as much as $1,000 a year for each eligible child. But this was scheduled to drop to $700 in 2005. Under the new law, the $1,000 maximum is retained through 2010.

Higher 15-percent refundability rate for child credit is accelerated to beginning of 2004.

Under pre-Act law, the child tax credit was refundable to the extent of the greater of:

• 10% (15% for tax years beginning after 2004) of earned income above $10,750 for 2004, or
• for a taxpayer with three or more qualifying children, the excess of his social security taxes for the tax year over his earned income credit for the year.

Under the Act, the 15% refundability percentage is accelerated to apply to tax years beginning after 2003. Thus, for tax years beginning in 2004, the child credit is refundable to the extent of the greater of:

• 15% of earned income above $10,750, or
• for a taxpayer with three or more qualifying children, the excess of his social security taxes for the tax year over his earned income credit for the year.

Marriage penalty relief extended.

The marriage penalty refers to tax-law oddities that force millions of two-income married couples each year to pay more in federal income taxes together than they would owe if each spouse were single. In recent years, the law has provided a degree of relief from the marriage penalty in two ways. First, the basic standard deduction for a married couple filing a joint return has been increased so that it equals twice the basic standard deduction for an unmarried individual filing a single return. Second, it increases the size of the 15-percent rate bracket for married couples filing joint returns. Under pre-Act law, however, these provisions were due to expire at the end of 2004. The Act extends both these provisions through 2010. Thus, for 2005 through 2010, the basic standard deduction for married taxpayers filing jointly will be twice the basic standard deduction of single taxpayers and the basic standard deduction for married taxpayers filing separately will be equal to the basic standard deduction of single taxpayers. Likewise, for 2005 through 2010, the endpoint of the 15% tax bracket for joint returns will be twice the endpoint of the 15% tax bracket for single returns.

10-percent tax bracket extended.

Under pre-Act law for 2005, the low 10% tax bracket was to apply to the first $6,000 of income for single filers, $12,000 for joint filers and with no inflation adjustments. That was down from the 2004 levels of $7,000 and $14,000, with inflation adjustments—$7,150 for singles, $14,300 for marrieds filing jointly. . Under the Act, the reduction in these amounts is repealed, and the inflation adjustments are continued. Thus, for 2005 through 2010, the 10% bracket applies to:

• the first $7,000 (as adjusted for inflation) of taxable income for single individuals and married taxpayers filing separately,
• the first $14,000 (as adjusted for inflation) of taxable income for married joint return filers and surviving spouses, and
• the first $10,000 of taxable income for heads of households, with all such taxable income levels indexed based on inflation increases occurring since 2002.

RIA calculates the new 10% bracket minimum income levels for 2005, as adjusted for inflation, to be:

• $7,300, for single filers and marrieds filing separate;
• $14,600 for marrieds filing jointly; and
• $10,450 for heads-of-households.

(10/12/04)

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Last modified: May 17, 2006