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Numerous changes appear in the new forms as the IRS tries to handle both new and prevously-enacted tax bills. To make sure you get the help you need with these changes, order today! We accept all major credit cards, Order by phone, fax, mail, or our secure on-line order form.

HowardNews

by HowardSoft®

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Fall 2004

Congress foils the IRS with last-minute Tax Law Changes

The IRS has been releasing advance drafts of revised forms earlier than ever this year, including welcome changes that add logic and consistency to many forms. But a bipartisan Congressional vote for a new tax bill on September 23 has foiled these laudable efforts by requiring the IRS to revise many of these advance drafts. We’ll cover the new bill first, including important unpublicized changes, then preview the forms for tax year 2004.

If you want more detail than we provide below, you can download here the complete Legislative Text (173 KB) of the Working Families Tax Relief Act of 2004 or the more helpful Conference Report (193 KB) which explains the prior law and the specific changes to it.

What the Press Didn’t Tell You

The new tax bill (Working Families Tax Relief Act of 2004) has received a lot of publicity for its extension of popular tax cuts for the middle class. However, none of the changes covered by the popular press will affect returns for the 2004 tax year – but changes they didn’t tell you will. Instead, they extend to later years provisions that were originally intended to cover only tax years 2003 and 2004. We’ll review these well-publicized changes later, but let’s first see what’s in store for the upcoming tax season.

Unpublicized changes affect tax year 2004!

Even though they have received little press, several provisions will have a major impact on the tax returns to be filed in the upcoming tax season as well as later years:

*Provision*	*Prior law*	*New law*	*Forms affected*
Nonrefundable personal credits allowed to reduce the alternative minimum tax (AMT)	Expired at end of tax year 2003	Reinstates allowance for tax years 2004 and 2005, for Credit for the Elderly and Disabled, Child and Dependent Care Credit, Mortgage Interest Credit, and Hope and Lifetime Learning Credits.	Form 1040 page 2, Schedule R, Form 2441, Form 8396, and Form 8863.
Above-the-line deduction for educator expenses	Expired at end of tax year 2003	Reinstates deduction on Form 1040 for tax years 2004 and 2005, allowing up to $250 reduction in AGI for each year for K through 12 teachers. through 2005	Form 1040 page 1
Additional child tax credit (refundable part)	Limited for 2004 to 10% of income above $10,750	Percentage changed to 15% for tax year 2004, providing more credit for taxpayers with a low tax liability. (The percentage was previously set to increase to 15% for tax year 2005.)	Form 8812
Use of nontaxable combat pay to maximize certain credits	No provision	Starting tax year 2004, nontaxable combat pay is included in income when computing the additional (refundable) child tax credit. In addition, an election is available to include it in earned income when computing the earned income credit if it results in a higher credit.	Form 8812 and Form 1040 page 2
Allowing the establishment of a new Archer MSA	Expired at end of tax year 2003	Extended through 2005. Congress originally intended that the Health Savings Accounts (HSAs), new for 2004, would replace Archer MSAs, but now allows both.	Form 8853
Tax incentives for investment in Washington D.C.	Expired at end of tax year 2003	D.C. first-time homebuyer credit reinstated for tax years 2004 and 2005. D.C. Enterprise Zone designation and related tax incentives also reinstated for same years.	Form 8859 and 8844
Research Credit	Expired 6/30/04	Renewed retroactively through 12/31/2005	Form 6765
Welfare-to-Work Credit	Expired 12/31/03	Renewed retroactively through 12/31/2005	Form 8861
Work Opportunity Credit	Expired 12/31/03	Renewed retroactively through 12/31/2005	Form 5884
Renewable Electricity Production Credit	Expired 12/31/03	Renewed retroactively through 12/31/2005	Form 8834
Incentives for electric and clean-fuel vehicles	Reduced to 75% for 2004, 50% for 2005, etc.	100% of electric vehicle credit and clean-fuel vehicle deduction allowed for 2004 and 2005. Postpones phaseout until 2006.	Forms 8834 and Form 1040 page 1

Publicized changes don’t apply until tax year 2005 (built into Tax Preparer for tax planning)

These changes were well covered by the press, so we’ll just give a quick overview here:

Child tax credit. Fixed at $1,000/child through 2010.
Marriage penalty relief. The standard deduction for marrieds remains double that for singles through 2010, and the size of the favorable 15% tax bracket remains double that for singles through 2010.
10% tax bracket. Applies to first $7,000 of income ($14,000 for marrieds) through 2010 (adjusted for inflation).
AMT exemption amount. Remains at $40,250 ($58,000 for marrieds) through tax year 2005.
Provisions for Indians. The Indian Employment Credit (Form 8845) and special recovery periods for the depreciation of business property on an Indian reservation extended through tax year 2005 .
Uniform definition of child. Applies starting tax year 2005 to the dependency exemption, child tax credit, earned income credit, dependent care credit, and head-of-household filing status.

How the New Forms Will Look

Anticipating no major tax legislation this year, the IRS recently redesigned numerous forms based on past legislation. In fact, the IRS has already released advance drafts of nearly every form we support in our software – a readiness like we have never seen before! Furthermore, many of the changes add a level of logic and consistency to the forms that has rarely been seen in the past. Unfortunately, many more changes will be made in the coming weeks as a result of the new tax bill, but we expect a quick response from the IRS.

*Form*	*What has changed*
Form 1040	Line 13b eliminated; a new line for deducting expenses of certain targeted employees (reservists, performing artists, and fee-basis government officials); a new line for deducting contributions to the new health savings accounts (HSAs); a new line for reporting nontaxable combat pay when used in computing the earned income credit.
Schedule C-EZ	Can replace Schedule C for business income as high as $5,000 (formerly $2,500).
Schedule D	Post-May 5 column eliminated; no more tax computations on page 2 (now in 1040 instructions).
Forms 2350, 2688, 4868	Gift tax sections of these filing extension forms removed, eliminating the former confusion caused by dual-purpose forms.
Form 2441	Page 2 overhauled to handle child care benefits received from a sole proprietorship or partnership.
Form 4797	Column for post-May 5, 2003 gain or loss eliminated because it is no longer necessary.
Form 5329	New section introduced to handle excess contributions to the new HSAs.
Form 6251	Tax computation on page 2 greatly changed because fewer capital gains tax rates now apply.
Form 6781	Post-May 5 column removed from all parts, and gains and losses split into separate columns in Part I. Column for 28% rate transactions removed from Sections A and B of Part II.
Form 8283	Coins, stamps, gems/jewelry, and books now lumped into a broader "collectibles" category, and new categories added for intellectual property, computer equipment, and conservation contribution.
Form 8606	Part III revised to properly limit first-time homebuyer expenses to distributions for the year.
Form 8611	Carryforwards of unused credit now handled and all instructions at the bottom of the form removed
Form 8801	Tax computation now more complex to handle the complexities unique to the prior year (2003).
Form 8812	Limitation to 10% of income above $10,750 to be changed to 15% when the final form is released.
Form 8834	New form to show no phaseout for 2004 and 2005 when the final form is released.
Form 8853	Revisions that appear in the IRS’s advance draft may be eliminated when the final form is released..
Form 8859	Although revised to apply only to carryovers, the final form should look just like last year’s form.
Form 8862	Completely different from the prior form, with different questions and hand-print boxes
Sch.R; Forms 2441, 8396, and 8863	Although redesigned by the IRS because of the expiring AMT allowance, these forms will look more like the originals when the final forms are released.
Forms 3468, 3800, 5884, 6478, 6765, 8586, 8834, 8846, and 8861	In a laudable display of consistency, the IRS redesigned these forms so that the limitation on these credits to net tax now follows the same format for all forms. Unfortunately, the designs were based on changes to Form 1040 that have since been repealed, so the IRS will have to revise these forms again.

A number of other less extreme changes appear in the advance drafts from the IRS, including the usual indexing with inflation. You can refer to our Spring 2004 HowardNews for information on many of these changes.

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