Among the changes created by the Working Families Tax Relief Act of 2004 (WFTRA), Pub. L. No. 108-311 (Oct 4, 2004) were:
Uniform Definition of Qualifying Child. WFTRA adopted a uniform definition of "qualifying child" for purposes of the dependency exemption, the Child Tax Credit, the Earned Income Credit, the Dependent Care Tax Credit and head of household filing status for taxable years beginning after December 31, 2004.
Under WFTRA, a child is generally a "qualifying child" if:
- The child has the same principal place of abode as the taxpayer for more than half the taxable year,
- The child has a specified relationship to the taxpayer (such as taxpayer's child or taxpayers grandchild), and
- The child has not yet attained a specified age (depending on the applicable Code section.
A tie-breaking rule applies if more than one taxpayer claims the child as a qualifying child.
Dependency Exemption. Under WFTRA "dependent" is defined in a completely revised Section 152 as either a qualifying child or a qualifying relative. In addition to the abode and relationship requirements listed above, a qualifying child must be under age 19 (or age 24 if child is a full-time student), but the support test no longer applies. This means that the taxpayer claiming the qualifying child does not have to provide over half of the qualifying child's support. A qualifying relative is someone who is not a qualified child, but meets the Code 152 relationship, income, and support tests.
Dependent Care Tax Credit. WFTRA eliminated the requirement that a taxpayer must maintain a household in order to claim the Dependent Care Tax Credit. This means that, if all other applicable requirements are made, the taxpayer can claim the Dependent Tax Credit for a child who lives with the taxpayer for more than half of the year, even if the taxpayer does not provide more than half the cost of maintaining the household. (Note that these changes will also affect which expenses are reimbursable under a Dependent Care Assistance Plan (DCAP) since the rules governing DCAPs incorporate many of the Dependent Care Tax Credit rules.
Child Tax Credit. WFTRA increased the Child Tax Credit (Credit) to $1,000 for taxable years 2005 - 2009. (Before this change, the Credit was $700 for taxable years 2005 - 2008, $800 for 2009, and $1,000 for 2010.) WFTRA also increased the refundability of the Credit to 15% (previously 10%) of the taxpayer's earned income in excess of $10,750 (with indexing). These increases will need to be taken into consideration when determining the relative tax benefits of participating in a DCAP vs. claiming the Child Tax Credit.
Watch for more articles discussing these changes.
Click here for a copy of the Working Families Tax Relief Act of 2004.