fying individual and $1,440 if there were two or more qualifying individuals. The applicable dollar limit ($2,400/$4,800) of otherwise eligible employment-related expenses was reduced by any amount excluded from income under an employer-provided dependent care assistance program. For example, a taxpayer with one qualifying individual who had $2,400 of otherwise eligible employment-related expenses but who excluded $1,000 of dependent care assistance had to reduce the dollar limit of eligible employment-related expenses for the dependent care tax credit by the amount of the exclusion to $1,400 ($2,400-$1,000 = $1,400). Under present and prior law, a qualifying individual is (1) a dependent of the taxpayer under the age of 13 for whom the taxpayer is eligible to claim a dependency exemption, (2) a dependent of the taxpayer who is physically or mentally incapable of caring for himself or herself, or (3) the spouse of the taxpayer; if the spouse is physically or mentally incapable of caring for himself or herself. Under prior law, the 30 percent credit rate was reduced, but not below 20 percent, by 1 percentage point for each $2,000 (or fraction thereof) of adjusted gross income above $10,000. The credit was not available to married taxpayers unless they filed a joint return. Exclusion for employer-provided dependent care Under present and prior law, amounts paid or incurred by an employer for dependent care assistance provided to an employee generally are excluded from the employee's gross income and wages if the assistance is furnished under a program meeting certain requirements. These requirements include that the program be described in writing, satisfy certain nondiscrimination rules, and provide for notification to all eligible employees. Dependent care assistance expenses eligible for the exclusion are defined the same as employment-related expenses with respect to a qualifying individual under the dependent care tax credit. Under prior law, the dependent care exclusion was limited to $5,000 per year, except that a married taxpayer filing a separate return could exclude only $2,500. Dependent care expenses excluded from income were not eligible for the dependent care tax credit (section 21(c)). Explanation of Provision EGTRRA increases the maximum amount of eligible employment-related expenses from $2,400 to $3,000, if there is one qualifying individual (from $4,800 to $6,000, if there are two or more qualifying individuals). EGTRRA also increases the maximum credit from 30 percent to 35 percent. Thus, the maximum credit is $1,050, if there is one qualifying individual and $2,100, if there are two or more qualifying individuals. Finally, EGTRRA modifies the phase-down of the credit. Under EGTRRA, the 35-percent credit rate is reduced, but not below 20 percent, by 1 percentage point for each $2,000 (or fraction thereof) of adjusted gross income above $15,000. Therefore, the credit percentage is reduced to 20 percent for taxpayers with adjusted gross income over $43,000. Effective Date The provision is effective for taxable years beginning after December 31, 2002. Revenue Effect The provision is estimated to reduce Federal fiscal year budget receipts by $336 million in 2003, $432 million in 2004, $413 million in 2005, $393 million in 2006, $380 million in 2007, $352 million in 2008, $317 million in 2009, $296 million in 2010, $73 million in 2011, and less than $500,000 in 2012. D. Tax Credit for Employer-Provided Child Care Facilities (sec. 303 of the Act and new sec. 45D of the Code) Present and Prior Law Prior law did not provide a tax credit to employers for supporting child care or child care resource and referral services. Under present and prior law, an employer may be able to deduct such expenses as ordinary and necessary business expenses. Alternatively, the employer may be required to capitalize the expenses and claim depreciation deductions over time. Explanation of Provision Under EGTRRA, taxpayers receive a tax credit equal to 25 percent of qualified expenses for employee child care and 10 percent of qualified expenses for child care resource and referral services. The maximum total credit that may be claimed by a taxpayer cannot exceed $150,000 per taxable year. Qualified child care expenses include costs paid or incurred: (1) to acquire, construct, rehabilitate or expand property that is to be used as part of the taxpayer's qualified child care facility; 17 (2) for the operation of the taxpayer's qualified child care facility, including the costs of training and certain compensation for employees of the child care facility, and scholarship programs; or (3) under a contract with a qualified child care facility to provide child care services to employees of the taxpayer. To be a qualified child care facility, the principal use of the facility must be for child care (unless it is the principal residence of the taxpayer), and the facility must meet all applicable State and local laws and regulations, including any licensing laws. A facility is not treated as a qualified child care facility with respect to a taxpayer unless: (1) it has open enrollment to the employees of the taxpayer; (2) use of the facility (or eligibility to use such facility) does not discriminate in favor of highly compensated employees of the taxpayer (within the meaning of section 414(q) of the Code; and (3) at least 30 percent of the children enrolled in the center are dependents of the taxpayer's employees, if the facility is the principal trade or business of the taxpayer. Qualified child care resource and referral expenses are amounts paid or incurred under a contract to provide child care re 17 In addition, a depreciation deduction (or amortization in lieu of depreciation) must be allowable with respect to the property and the property must not be part of the principal residence of the taxpayer or any employee of the taxpayer. source and referral services to the employees of the taxpayer. Qualified child care services and qualified child care resource and referral expenditures must be provided (or be eligible for use) in a way that does not discriminate in favor of highly compensated employees of the taxpayer (within the meaning of section 414(q) of the Code. Any amounts for which the taxpayer may otherwise claim a tax deduction are reduced by the amount of these credits. Similarly, if the credits are taken for expenses of acquiring, constructing, rehabilitating, or expanding a facility, the taxpayer's basis in the facility is reduced by the amount of the credits. Credits taken for the expenses of acquiring, constructing, rehabilitating, or expanding a qualified facility are subject to recapture for the first ten years after the qualified child care facility is placed in service. The amount of recapture is reduced as a percentage of the applicable credit over the ten-year recapture period. Recapture takes effect if the taxpayer either ceases operation of the qualified child care facility or transfers its interest in the qualified child care facility without securing an agreement to assume recapture liability for the transferee. The recapture tax is not treated as a tax for purposes of determining the amount of other credits or determining the amount of the alternative minimum tax. 18 Other rules apply. Effective Date The provision is effective for taxable years beginning after December 31, 2001. Revenue Effect The provision is estimated to reduce Federal fiscal year budget receipts by $48 million in 2002, $108 million in 2003, $129 million in 2004, $142 million in 2005, $156 million in 2006, $169 million in 2007, $178 million in 2008, $188 million in 2009, $196 million in 2010, $90 million in 2011 and, less than $500,000 in 2012. 18 A technical correction was enacted in section 411 of the Job Creation and Worker Assistance Act of 2002 described in Part Eight of this document to provide this clarification. III. MARRIAGE PENALTY RELIEF PROVISIONS A. Standard Deduction Marriage Penalty Relief (sec. 301 of the Act and sec. 63 of the Code) Marriage penalty Present and Prior Law A married couple generally is treated as one tax unit that must pay tax on the couple's total taxable income. Although married couples may elect to file separate returns, the rate schedules and other provisions are structured so that filing separate returns usually results in a higher tax than filing a joint return. Other rate schedules apply to single persons and to single heads of households. A "marriage penalty" exists when the combined tax liability of a married couple filing a joint return is greater than the sum of the tax liabilities of each individual computed as if they were not married. A "marriage bonus" exists when the combined tax liability of a married couple filing a joint return is less than the sum of the tax liabilities of each individual computed as if they were not married. Basic standard deduction Taxpayers who do not itemize deductions may choose the basic standard deduction (and additional standard deductions, if applicable), 19 which is subtracted from adjusted gross income ("AĞI”) in arriving at taxable income. The size of the basic standard deduction varies according to filing status and is adjusted annually for inflation. For 2001, the basic standard deduction amount for single filers is 60 percent of the basic standard deduction amount for married couples filing joint returns. Thus, two unmarried individuals have standard deductions whose sum exceeds the standard deduction for a married couple filing a joint return. Reasons for Change The Congress was concerned about the inequity that arises when two working single individuals marry and experience a tax increase solely by reason of their marriage. Any attempt to address the marriage tax penalty involves the balancing of several competing principles, including equal tax treatment of married couples with equal incomes, the determination of equitable relative tax burdens of single individuals and married couples with equal incomes, and the goal of simplicity in compliance and administration. The Congress believed that an increase in the standard deduction for married couples filing a joint return in conjunction with the other provi 19 Additional standard deductions are allowed with respect to any individual who is elderly (age 65 or over) or blind. (25) sions of EGTRRA was a responsible reduction of the marriage tax penalty. Explanation of Provision EGTRRA increases the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return. The basic standard deduction for a married taxpayer filing separately will continue to equal one-half of the basic standard deduction for a married couple filing jointly; thus, the basic standard deduction for unmarried individuals filing a single return and for married couples filing separately will be the same. The increase in the standard deduction is phased-in over five years beginning in 2005 and would be fully phased-in for 2009 and thereafter. Table 5, below, shows the standard deduction for married couples filing a joint return as a percentage of the standard deduction for single individuals during the phase-in period. 20 Table 5.-Phase-In of Increase of Standard Deduction for Married Couples Filing Joint Returns The provision is effective for taxable years beginning after December 31, 2004. Revenue Effect The provision is estimated to reduce Federal fiscal year budget receipts by $685 million in 2005, $1,954 million in 2006, $2,580 million in 2007, $2,772 million in 2008, $3,164 million in 2009, $2,932 million in 2010, and $831 million in 2011. 20 A technical correction was enacted in section 411 of the Job Creation and Worker Assistance Act of 2002 described in Part eight of this document to: (1) allow certain married taxpayers to file separate returns during the transition years; and (2) retain the rounding rules generally applicable to the amounts of standard deductions in section 63 of the Code. |