All you married couples out there, dont get giddy with delight just yet. The marriage penalty is not all together gone yet but its definitely something to celebrate. Our good friends on Capitol Hill have decided to cut us all a break. The House Ways and Means Committee has approved legislation to provide married couple some tax relief through changes in the earned income credit, increase of child tax credit, and alterations of alternative minimum tax (estimated to hit 15 million Americans by 2010).
Although there is very little relief in the short term, most of these tax breaks will be phased in within this decade. The immediate effect of this bill would be the increase of $100 in the child tax credit starting this year. By 2006, the child tax credit would reach $1000. In the description of the bill the committee has stated, The proposal would allow the child tax credit to the extent of the full amount of the individuals regular income tax and alternative minimum tax and the refundable child tax credit would no longer be reduced by the amount of the alternative minimum tax.
Child tax credit is nonrefundable; however with individuals with three or more children the credit becomes refundable. Presently the refundable credit is affected by the amount of alternative minimum tax owed by the taxpayer. Starting with this year the AMT will no longer have any effect on the refundable child tax credit.
Basic standard deduction for single filers is equal to about 60 percent of the deduction handed out to married couple filing jointly. The committee has decided to double the basic standard deduction given to married couple filing jointly. In the past two single filers filing separately have gotten a deduction that is 20% more than what a married couple filing jointly have gotten from the IRS. This was widely acknowledged as the marriage penalty. Starting next year, this would no longer be the case. A single filers standard deduction would equal that of a married filing separately.
The bill also expands the 15% tax bracket to give more tax relief to married taxpayers. It works the same way the basic standard deduction increase. The threshold for the 15% tax bracket for a single filer is equal to 60% of the threshold for married filing jointly. Starting in 2004, the threshold for married filing jointly will be gradually phased in to equal twice as much as the single filer by 2009. For example, if the single filer threshold remains at $27,050 until 2004 than the married filing jointly threshold will be at $54,100.
Starting 2005, the AMT exemption threshold will be gradually phased in by 2007 to increase by $2000 for married couple filing jointly. Right now its $45,000.
Good news also for the folks who use the earned income credit. The definition of the earned income now excludes nontaxable amounts such as employer contributions to retirement plans, fringe benefits, and educational assistance. The earned income amount used to calculate the earned income credit will be increased to 110 percent for married couples filing jointly compared to all others. The EIC will no longer be reduced by the individuals alternative minimum tax liability. This is effective starting next year.