[Analytical Perspectives]
[Federal Receipts and Collections]
[17. Federal Borrowing and Debt]
[From the U.S. Government Printing Office, www.gpo.gov]
Receipts (budget and off-budget) are taxes and other collections from
the public that result from the exercise of the Federal Government's
sovereign or governmental powers. The difference between receipts and
outlays determines the surplus or deficit.
The Federal Government also collects income from the public from
market-oriented activities. Collections from these activities, which are
subtracted from gross outlays, rather than added to taxes and other
governmental receipts, are discussed in the following Chapter.
Growth in receipts. Total receipts in 2006 are estimated to be
$2,177.6 billion, an increase of $124.7 billion or 6.1 percent relative
to 2005. Receipts are projected to grow at an average annual rate of 6.7
percent between 2006 and 2010, rising to $2,820.9 billion. This growth
in receipts is largely due to assumed increases in incomes resulting
from both real economic growth and inflation.
As a share of GDP, receipts are projected to increase from 16.8
percent in 2005 to 16.9 percent in 2006. The receipts share of GDP is
projected to increase annually thereafter, rising to 17.7 percent in
2010.
Table 17-1. RECEIPTS BY SOURCE--SUMMARY
(in billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimate
2004 Actual -----------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 2010
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Individual income taxes........................ 809.0 893.7 966.9 1,071.2 1,167.2 1,245.1 1,353.3
Corporation income taxes....................... 189.4 226.5 220.3 229.8 243.4 252.4 257.6
Social insurance and retirement receipts....... 733.4 773.7 818.8 866.2 911.7 959.1 1,016.2
(On-budget).................................. (198.7) (212.4) (225.6) (237.0) (247.2) (258.4) (273.0)
(Off-budget)................................. (534.7) (561.4) (593.2) (629.2) (664.6) (700.7) (743.2)
Excise taxes................................... 69.9 74.0 75.6 77.2 79.0 81.0 82.9
Estate and gift taxes.......................... 24.8 23.8 26.1 23.5 24.3 26.0 20.1
Customs duties................................. 21.1 24.7 28.3 30.6 31.9 33.9 35.3
Miscellaneous receipts......................... 32.6 36.4 41.6 45.6 49.5 52.6 55.4
--------------------------------------------------------------------------------------------------------
Total receipts............................... 1,880.1 2,052.8 2,177.6 2,344.2 2,507.0 2,650.0 2,820.9
(On-budget)................................ (1,345.3) (1,491.5) (1,584.4) (1,715.0) (1,842.4) (1,949.3) (2,077.7)
(Off-budget)............................... (534.7) (561.4) (593.2) (629.2) (664.6) (700.7) (743.2)
Total receipts as a percentage of GDP........ 16.3 16.8 16.9 17.2 17.5 17.5 17.7
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Table 17-2. EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
(In billions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
------------------------------------------------------
2006 2007 2008 2009 2010
----------------------------------------------------------------------------------------------------------------
Social security (OASDI) taxable earnings base increases:
$90,000 to $93,000 on Jan. 1, 2006..................... 1.4 3.8 4.2 4.8 5.4
$93,000 to $97,200 on Jan. 1, 2007..................... ......... 2.0 5.4 6.1 6.9
$97,200 to $101,400 on Jan. 1, 2008.................... ......... ......... 2.1 5.5 6.3
$101,400 to $106,200 on Jan. 1, 2009................... ......... ......... ......... 2.4 6.5
$106,200 to $111,300 on Jan. 1, 2010................... ......... ......... ......... ......... 2.6
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[[Page 264]]
ENACTED LEGISLATION
Several laws were enacted in 2004 that have an effect on governmental
receipts. The major legislative changes affecting receipts are described
below.
WORKING FAMILIES TAX RELIEF ACT OF 2004
The Working Families Tax Relief Act of 2004 (2004 tax relief act),
which was signed by President Bush on October 4, 2004, was the fourth
major tax measure enacted during this Administration. In addition to
extending key parts of the President's tax relief plan for working
families, which were scheduled to expire at the end of 2004, this Act
provided tax relief to certain military personnel with families, created
a uniform definition of a qualifying child for tax purposes, and
reinstated a number of expired or expiring business-related tax
incentives. The major provisions of this Act that affect receipts are
described below. The year-by-year effect of these changes (as well as
some of the changes provided in the 2001 and 2003 tax cuts) on various
provisions of the tax code is shown in Chart 17-1.
Chart 17-1. Major Provisions of the Tax Code Under the 2001, 2003 and 2004 Tax Cuts
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision 2003 2004 2005 2006 2007 2008 2009 2010 2011
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Individual Income Tax Rates reduced to ................ ................ ................... ................ ............... ............... ............... Rates increased
Rates 35, 33, 28, and 25 to 39.6, 36,
percent 31, and 28
percent
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10 Percent Bracket Top of bracket ................ ................ ................... ................ ............... ............... ............... Bracket
increased to eliminated,
$7,000/$14,000 for making lowest
single/joint bracket 15
filers and percent
inflation-indexed
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
15 Percent Bracket for Top of bracket for ................ ................ ................... ................ ............... ............... ............... Top of bracket
Joint Filers joint filers for joint
increased to 200 filers reduced
percent of top of to 167 percent
bracket for single of top of
filers bracket for
single filers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Standard Deduction for Standard deduction ................ ................ ................... ................ ............... ............... ............... Standard
Joint Filers for joint filers deduction for
increased to 200 joint filers
percent of reduced to 167
standard deduction percent of
for single filers standard
deduction for
single filers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Child Credit Tax credit for each ................ ................ ................... ................ ............... ............... ............... Tax credit for
qualifying child each
under age 17 qualifying
increased to child under
$1,000 age 17 reduced
to $500
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Estate Taxes Top rate reduced to Top rate reduced Top Rate reduced Top rate reduced to Top rate reduced ............... Exempt amount Estate tax Top rate
49 percent to 48 percent to 47 percent 46 percent to 45 percent increased to repealed increased to
Exempt amount Exempt amount $3.5 million 60 percent
increased to increased to $2 Exempt amount
$1.5 million million reduced to $1
million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 265]]
Small Business, Expensing Deduction increased ................ ................ ................... ................ Deduction ............... ............... ...............
to $100,000, declines to
reduced by amount $25,000,
qualifying reduced by
property exceeds amount
$400,000, and both qualifying
amounts inflation- property
indexed exceeds
Includes software $200,000 and
amounts not
inflation-
indexed
Does not apply
to software
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Capital Gains Tax rate on capital ................ ................ ................... ................ Tax on capital Tax rate on ............... ...............
gains reduced to 5/ gains capital gains
15 percent eliminated for increased to
taxpayers in 10/20 percent
10/15 percent
tax brackets
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Dividends Tax rate on ................ ................ ................... ................ Tax on Dividends taxed ............... ...............
dividends reduced dividends at standard
to 5/15 percent eliminated for income tax
taxpayers in rates
10/15 percent
tax brackets
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Bonus Depreciation Bonus depreciation ................ Bonus ................... ................ ............... ............... ............... ...............
increased to 50 depreciation
percent of expires
qualified property
aquired after
5/5/03
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Alternative Minimum Tax AMT exemption ................ ................ AMT exemption ................ ............... ............... ............... ...............
amount increased amount reduced to
to $40,250/$58,000 $33,750/$45,000
for single/joint for single /joint
filers filers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Tax Relief for Families
Extend accelerated expansion of the 10-percent individual income tax
rate bracket.--The Economic Growth and Tax Relief Reconciliation Act
(2001 tax cut) created a 10-percent individual income tax bracket, which
applied to the first $6,000 of taxable income for single taxpayers and
married taxpayers filing separate returns (increasing to $7,000 for
taxable years beginning after December 31, 2007 and before January 1,
2011), the first $10,000 of taxable income for heads of household, and
the first $12,000 of taxable income for married taxpayers filing a joint
return (increasing to $14,000 for taxable years beginning after December
31, 2007 and before January 1, 2011). The 2001 tax cut provided for
annual inflation adjustments to the width of the 10-percent tax rate
bracket, effective for taxable years beginning after December 31, 2008.
The Jobs and Growth Tax Relief Reconciliation Act (2003 jobs and growth
tax cut) accelerated the expansions of the 10-percent tax rate bracket
scheduled to be effective beginning in taxable year 2008, to be
effective in taxable years 2003 and 2004. For taxable years beginning
after 2004 and before January 1, 2011, the taxable income levels for the
10-percent individual income tax rate bracket were scheduled to revert
to the levels provided under the 2001 tax cut. The 2003 jobs and growth
tax cut also provided for annual inflation adjustments to the width of
the 10-percent tax rate bracket for taxable years beginning in 2004. The
2004 tax relief act extended the expansions of the 10-percent tax rate
bracket provided under the 2003 jobs and growth tax cut through taxable
year 2007 and provided for continued annual inflation adjustments to the
width of 10-percent tax rate bracket for taxable years beginning after
2004. As provided under the 2001 tax cut, the 10-percent tax rate
bracket will remain in effect for taxable years 2008 through 2010, and
will be eliminated for taxable years beginning after December 31, 2010.
Extend accelerated increase in standard deduction for married
taxpayers filing a joint return.--Under the 2001 tax cut, the standard
deduction for married taxpayers filing a joint return, which was 167
percent of the standard deduction for unmarried indi
[[Page 266]]
viduals, was increased to double the standard deduction for single
taxpayers over a five-year period. Under the phasein, the standard
deduction for married taxpayers filing a joint return increased to 174
percent of the standard deduction for single taxpayers in taxable year
2005, 184 percent in taxable year 2006, 187 percent in taxable year
2007, 190 percent in taxable year 2008, and 200 percent in taxable years
2009 and 2010. The 2003 jobs and growth tax cut accelerated the increase
in the standard deduction for married taxpayers filing a joint return to
200 percent of the standard deduction for single taxpayers, effective
for taxable years 2003 and 2004. For taxable years 2005 through 2010,
the standard deduction for married taxpayers filing a joint return was
scheduled to revert to the levels provided under the 2001 tax cut. The
2004 tax relief act extended the expanded standard deduction for married
taxpayers filing a joint return provided under the 2003 jobs and growth
tax cut to apply to taxable years 2005 through 2008. As provided under
the 2001 tax cut, the standard deduction for married taxpayers filing a
joint return will remain at 200 percent of the standard deduction for
single taxpayers in 2009 and 2010, but will decline to 167 percent of
the standard deduction for single taxpayers, effective for taxable years
beginning after December 31, 2010.
Extend accelerated expansion of the 15-percent individual income tax
rate bracket for married taxpayers filing a joint return.--Under the
2001 tax cut, the maximum taxable income in the 15-percent individual
income tax rate bracket for married taxpayers filing a joint return,
which was 167 percent of the corresponding amount for an unmarried
individual, was increased to twice the corresponding amount for
unmarried individuals over a four-year period. Under the phasein, the
maximum taxable income in the 15-percent tax rate bracket for married
taxpayers filing a joint return increased to 180 percent of the
corresponding amount for single taxpayers in taxable year 2005, 187
percent in taxable year 2006, 193 percent in taxable year 2007, and 200
percent in taxable years 2008, 2009 and 2010. The 2003 jobs and growth
tax cut accelerated the increase in the size of the 15-percent tax rate
bracket for married taxpayers filing a joint return to twice the
corresponding tax rate bracket for single taxpayers, effective for
taxable years 2003 and 2004. For taxable years 2005 through 2010, the
size of the 15-percent tax rate bracket for married taxpayers filing a
joint return was scheduled to revert to the levels provided under the
2001 tax cut. The 2004 tax relief act extended the expanded 15-percent
tax rate bracket for married taxpayers filing a joint return provided
under the 2003 jobs and growth tax cut through taxable year 2007. As
provided under the 2001 tax cut, the maximum taxable income in the 15-
percent tax rate bracket for married taxpayers filing a joint return
will remain at twice the corresponding tax rate bracket for single
taxpayers in 2008, 2009, and 2010, but will decline to 167 percent of
the corresponding amount for single taxpayers, effective for taxable
years beginning after December 31, 2010.
Extend accelerated increase in child tax credit.--Under the 2001 tax
cut, the maximum amount of the tax credit for each qualifying child
under the age of 17 increased from $500 to $1,000 over a period of 10
years, as follows: the credit increased to $600 for taxable years 2001
through 2004, $700 for taxable years 2005 through 2008, $800 for taxable
year 2009, and $1,000 for taxable year 2010. The 2003 jobs and growth
tax cut accelerated the increase in the credit to $1,000 per child,
effective for taxable years 2003 and 2004. For taxable years 2005
through 2010, the credit was scheduled to revert to the levels provided
under the 2001 tax cut. The 2004 tax relief act extended the increased
credit of $1,000 per child for five years, for taxable years 2005
through 2009. As provided under the 2001 tax cut, the credit will be
$1,000 per child for taxable year 2010, but will decline to $500 for
taxable years beginning after December 31, 2010.
Accelerate increase in refundability of child tax credit.--Prior to
enactment of the 2001 tax cut, taxpayers with three or more qualifying
children could be eligible for a refundable additional child tax credit
if they had social security taxes, even if they had little or no
individual income tax liability. However, taxpayers with one or two
children were not eligible for the refundable additional child tax
credit. The 2001 tax cut extended eligibility for the refundable credit
to taxpayers with one or two children. Under the 2001 tax cut, the
additional child tax credit was refundable to the extent of 10 percent
of the taxpayer's earned income in excess of $10,000 for taxable years
2001 through 2004; the percentage was scheduled to increase to 15
percent for taxable years 2005 through 2010. The $10,000 income
threshold was indexed for inflation beginning in 2002. The 2004 tax
relief act accelerated to 2004 the increase in refundability to 15
percent that had been scheduled for 2005 under prior law.
Tax Relief for Military Families
Modify treatment of combat pay for purposes of computing the child tax
credit and earned income tax crcdit (EITC).--Compensation received by an
active member of the Armed Forces for service in a combat zone or while
hospitalized as a result of wounds, disease, or injury incurred while
serving in a combat zone is not included in gross income for tax
purposes. The 2004 tax relief act provided that combat pay otherwise
excluded from gross income is treated as earned income for purposes of
calculating the refundable portion of the child credit, effective for
taxable years beginning after December 31, 2003. The 2004 tax relief act
also provided that a taxpayer could elect to treat combat pay otherwise
excluded from gross income as earned income for purposes of the EITC,
effective for taxable years ending after October 4, 2004 and before
January 1, 2006.
[[Page 267]]
Alternative Minimum Tax (AMT) Relief for Individuals
Extend AMT exemption amount.--An alternative minimum tax is imposed on
individuals to the extent that the tentative minimum tax exceeds the
regular tax. An individual's tentative minimum tax generally is equal to
the sum of: (1) 26 percent of the first $175,000 ($87,500 in the case of
a married individual filing a separate return) of alternative minimum
taxable income (taxable income modified to take account of specified
preferences and adjustments) in excess of an exemption amount and (2) 28
percent of the remaining excess. The AMT exemption amounts, as provided
under the 2003 jobs and growth tax cut, were: (1) $58,000 for married
taxpayers filing a joint return and surviving spouses for taxable years
2003 and 2004, declining in 2005 to $45,000; (2) $40,250 for single
taxpayers for taxable years 2003 and 2004, declining in 2005 to $33,750;
and (3) $29,000 for married taxpayers filing a separate return and
estates and trusts, for taxable years 2003 and 2004, declining in 2005
to $22,500. The exemption amounts are phased out by an amount equal to
25 percent of the amount by which the individual's alternative minimum
taxable income exceeds: (1) $150,000 for married taxpayers filing a
joint return and surviving spouses; (2) $112,500 for single taxpayers;
and (3) $75,000 for married taxpayers filing a separate return, estates
and trusts. The 2004 tax relief act extended for one year, through
taxable year 2005, the exemption amounts provided under the 2003 jobs
and growth tax cut for taxable years 2003 and 2004. Effective for
taxable years beginning after December 31, 2005, the AMT exemption
amounts will decline to $33,750 for single taxpayers, $45,000 for
married taxpayers filing a joint return and surviving spouses, and
$22,500 for married taxpayers filing a separate return and estates and
trusts.
Extend ability to offset the AMT with nonrefundable personal
credits.--A temporary provision of prior law permitted nonrefundable
personal tax credits to offset both the regular tax and the alternative
minimum tax for taxable years beginning before January 1, 2004. The 2004
tax relief act extended minimum tax relief for nonrefundable personal
credits for two years, to apply to taxable years 2004 and 2005. The
extension did not apply to the child credit, the saver credit, or the
adoption credit, which were provided AMT relief through December 31,
2010 under the 2001 tax cut.
Tax Simplification
Establish uniform definition of a qualifying child.--The tax code
provides assistance to families with children through the dependent
exemption, head-of-household filing status, child tax credit, child and
dependent care tax credit, and EITC. Under prior law, each provision
defined an eligible ``child'' differently, thereby requiring taxpayers
to wade through pages of bewildering rules and instructions, resulting
in confusion and error. Under the 2004 tax relief act, effective for
taxable years beginning after December 31, 2004, a qualifying child must
meet the following three tests: (1) Relationship--The child must be the
taxpayer's biological or adopted child, stepchild, sibling, step-
sibling, foster child, or a descendant of one of these individuals. (2)
Residence--The child must live with the taxpayer in the same principal
home in the United States for more than half of the taxable year. (3)
Age--The child must be under age 19 (under age 24 in the case of a full-
time student), or totally and permanently disabled. However, prior-law
requirements that a child be under age 13 for the dependent care credit
and under age 17 for the child tax credit, were maintained. Neither the
support nor gross income tests of prior law apply to qualifying children
who meet these three tests. In addition, taxpayers are no longer
required to meet a household maintenance test when claiming the child
and dependent care tax credit. Taxpayers generally can continue to claim
individuals who do not meet the relationship, residency, or age tests as
dependents if they meet the dependency requirements under prior law, and
no other taxpayer is eligible to claim the same individual as a
qualifying child. A tie-breaking rule applies if a child would be a
qualifying child with respect to more than one individual and if more
than one individual claims a benefit with respect to that child.
Expiring Provisions
Extend the research and experimentation (R&E) tax credit.--The 20-
percent tax credit for qualified research and experimentation
expenditures above a base amount and the alternative incremental credit
expired with respect to expenditures incurred after June 30, 2004. The
2004 tax relief act extended these credits for eighteen months, to apply
to expenditures incurred before January 1, 2006.
Extend the work opportunity tax credit.--The work opportunity tax
credit provides incentives for hiring individuals from certain targeted
groups. The credit generally applies to the first $6,000 of wages paid
to several categories of economically disadvantaged or handicapped
workers. The credit rate is 25 percent of qualified wages for employment
of at least 120 hours but less than 400 hours and 40 percent for
employment of 400 or more hours. Under prior law, the credit was
available for qualified individuals who began work before January 1,
2004. The 2004 tax relief act extended the credit for two years, to
apply to qualified individuals beginning work after December 31, 2003
and before January 1, 2006.
Extend the welfare-to-work tax credit.--The welfare-to-work tax credit
provides an incentive for hiring certain recipients of long-term family
assistance. The credit is 35 percent of up to $10,000 of eligible wages
in the first year of employment and 50 percent of wages up to $10,000 in
the second year of employment. Eligible wages include cash wages plus
the cash value of
[[Page 268]]
certain employer-paid health, dependent care, and educational fringe
benefits. The minimum employment period that employees must work before
employers can claim the credit is 400 hours. The 2004 tax relief act
extended this credit for two years, to apply to qualified individuals
who begin work after December 31, 2003 and before January 1, 2006. Under
prior law the credit was available with respect to qualified individuals
beginning work before January 1, 2004.
Extend tax incentives for employment and investment on Indian
reservations.--The 2004 tax relief act extended for one year, through
December 31, 2005, the employment tax credit for qualified workers
employed on an Indian reservation and the accelerated depreciation rules
for qualified property used in the active conduct of a trade or business
within an Indian reservation. The employment tax credit is not available
for employees involved in certain gaming activities or who work in a
building that houses certain gaming activities. Similarly, property used
to conduct or house certain gaming activities is not eligible for the
accelerated depreciation recovery periods.
Extend authority to issue Qualified Zone Academy Bonds.--State and
local governments are allowed to issue ``qualified zone academy bonds,''
the interest on which is effectively paid by the Federal government in
the form of an annual income tax credit. The proceeds of the bonds have
to be used for teacher training, purchases of equipment, curriculum
development, or rehabilitation and repairs at certain public school
facilities. Under prior law, a nationwide total of $400 million of
qualified zone academy bonds were authorized to be issued in each of
calendar years 1998 through 2003. In addition, unused authority arising
in 1998 and 1999 could be carried forward for up to three years and
unused authority arising in 2000 through 2003 could be carried forward
for up to two years. The 2004 tax relief act authorized the issuance of
an additional $400 million of qualified zone academy bonds in each of
calendar years 2004 and 2005; unused authority can be carried forward
for up to two years.
Extend authority to issue Liberty Zone Bonds.--The Job Creation and
Worker Assistance Act (2002 economic stimulus act) provided authority to
issue an aggregate of $8 billion of tax-exempt private activity bonds
during calendar years 2002, 2003, and 2004 for the acquisition,
construction, reconstruction, and renovation of nonresidential real
property, residential rental property, and public utility property in
the New York City Liberty Zone. Authority to issue these bonds, which
are not subject to the aggregate annual State private activity bond
volume limit, was extended through calendar year 2009 under the 2004 tax
relief act. The 2004 tax relief act also extended for one year, through
December 31, 2005, an expired provision that allowed certain bonds used
to finance projects in New York City to be eligible for one additional
advance refunding.
Extend the District of Columbia (DC) Enterprise Zone.--The DC
Enterprise Zone includes the DC Enterprise Community and District of
Columbia census tracts with a poverty rate of at least 20 percent.
Businesses in the zone are eligible for: (1) A wage credit equal to 20
percent of the first $15,000 in annual wages paid to qualified employees
who reside within the District of Columbia; (2) $35,000 in increased
section 179 expensing; and (3) in certain circumstances, tax-exempt bond
financing. In addition, a capital gains exclusion is allowed for certain
investments held more than five years and made within the DC Zone, or
within any District of Columbia census tract with a poverty rate of at
least 10 percent. Under prior law, the DC Zone incentives were in effect
for the period from January 1, 1998 through December 31, 2003. The 2004
tax relief act extended the DC Zone incentives for two years, through
December 31, 2005.
Extend the first-time homebuyer credit for the District of Columbia.--
A one-time, nonrefundable $5,000 credit is available to purchasers of a
principal residence in the District of Columbia who have not owned a
residence in the District during the year preceding the purchase. The
credit phases out for taxpayers with modified adjusted gross income
between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
Under prior law, the credit did not apply to purchases after December
31, 2003. The credit was extended for two years under the 2004 tax
relief act, making it available with respect to purchases after December
31, 2003 and before January 1, 2006.
Extend deduction for corporate donations of computer technology.--The
charitable contribution deduction that may be claimed by corporations
for donations of inventory property generally is limited to the lesser
of fair market value or the corporation's basis in the property.
However, corporations are provided augmented deductions, not subject to
this limitation, for contributions of computer technology and equipment
to public libraries and to U.S. schools for educational purposes in
grades K-12. The 2004 tax relief act extended the augmented deduction,
which expired with respect to donations made after December 31, 2003, to
apply to donations made before January 1, 2006.
Extend the above-the-line deduction for qualified out-of-pocket
classroom expenses.--Teachers who itemize deductions (do not use the
standard deduction) and incur unreimbursed, job-related expenses are
allowed to deduct those expenses to the extent that when combined with
other miscellaneous itemized deductions they exceed two percent of
adjusted gross income (AGI). Under prior law, certain teachers and other
elementary and secondary school professionals were allowed to treat up
to $250 in annual qualified out-of-pocket classroom expenses as a non-
itemized deduction (above-the-line deduction), effective for expenses
incurred in taxable years beginning after December 31, 2001 and before
January 1, 2004. Unreimbursed expenditures for
[[Page 269]]
certain books, supplies and equipment related to classroom instruction
qualified for the above-the-line deduction. Expenses claimed as an
above-the-line deduction could not be claimed as an itemized deduction.
The 2004 tax relief act extended the above-the-line deduction for two
years, to apply to qualified out-of-pocket expenditures incurred after
December 31, 2003 and before January 1, 2006.
Extend Archer Medical Savings Accounts (MSAs).--Self-employed
individuals and employees of small firms are allowed to establish Archer
MSAs; the number of accounts is capped at 750,000. In addition to other
requirements: (1) individuals who establish Archer MSAs must be covered
by a high-deductible health plan (and no other plan) with a deductible
of at least $1,750 but not greater than $2,650 for policies covering a
single person and a deductible of at least $3,500 but not greater than
$5,250 in all other cases (these amounts are indexed annually for
inflation); (2) tax-preferred contributions are limited to 65 percent of
the deductible for single policies and 75 percent of the deductible for
other policies; and (3) either an individual or an employer, but not
both, may make a tax-preferred contribution to an Archer MSA for a
particular year. Under prior law, no new contributions could be made to
an Archer MSA after December 31, 2003, except for the following: (1)
those made by or on behalf of individuals who previously had Archer MSA
contributions and (2) those made by individuals employed by a
participating employer. The 2004 tax relief act extended the Archer MSA
program for two years, thereby allowing new Archer MSAs through December
31, 2005.
Extend tax on failure to comply with mental health parity requirements
applicable to group health plans.--Under prior law, group health plans
that provided both medical and surgical benefits and mental health
benefits, could not impose aggregate life-time or annual dollar limits
on mental health benefits that were not imposed on substantially all
medical and surgical benefits. An excise tax of $100 per day for each
individual affected (during the period of noncompliance) was imposed on
an employer sponsoring a group plan that failed to meet these
requirements. For a given taxable year, the tax was limited to the
lesser of 10 percent of the employer's group health insurance expenses
for the prior taxable year or $500,000. The mental health parity
requirements expired with respect to benefits for services provided on
or after December 31, 2004. The excise tax imposed on plans that failed
to meet the requirements expired with respect to benefits for services
provided after December 31, 2003. The 2004 tax relief act extended the
mental health parity requirements to apply to benefits for services
provided before January 1, 2006. The act also extended the excise tax,
but only with respect to benefits for services provided after October 3,
2004 and before January 1, 2006. Therefore, the excise tax on failures
to meet the mental health parity requirements did not apply to benefits
for services provided after December 31, 2003 and before October 4,
2004.
Extend tax credit for the purchase of electric vehicles.--A 10-percent
tax credit, up to a maximum of $4,000, is provided for the cost of a
qualified electric vehicle. Under prior law, the full amount of the
credit was available for purchases prior to January 1, 2004. The credit
began to phase down in 2004 and was not available for purchases after
December 31, 2006. The 2004 tax relief act extended the full amount of
the credit for two years, making it available for purchases in 2004 and
2005. As provided under prior law, the credit is reduced by 75 percent
for purchases in 2006 and is not available for purchases after December
31, 2006.
Extend deduction for qualified clean-fuel vehicles and qualified
clean-fuel vehicle refueling property.--Under prior law, certain costs
of acquiring clean-fuel vehicles (vehicles that use certain clean-
burning fuels) and property used to store or dispense clean-burning
fuels, could be expensed and deducted when the property was placed in
service. For qualified clean-fuel vehicles, the maximum allowable
deduction was $50,000 for a truck or van with a gross vehicle weight
over 26,000 pounds, $5,000 for a van or truck with a gross weight
between 10,000 and 26,000 pounds; and $2,000 in the case of any other
motor vehicle. The full amount of the deduction could be claimed for
vehicles placed in service before January 1, 2004, but began to phase
down for vehicles placed in service after December 31, 2003, and was not
available after December 31, 2006. The 2004 tax relief act extended the
full amount of the deduction for two years, making it available for
vehicles placed in service in 2004 and 2005. As provided under prior
law, the deduction is reduced by 75 percent for vehicles placed in
service in 2006 and is not available for vehicles placed in service
after December 31, 2006.
Extend suspension of net income limitation on percentage depletion
from marginal oil and gas wells.--Taxpayers are allowed to recover their
investment in oil and gas wells through depletion deductions. For
certain properties, deductions may be determined using the percentage
depletion method; however, in any year, the amount deducted generally
may not exceed 100 percent of the net income from the property. Under
prior law, for taxable years beginning after December 31, 1997 and
before January 1, 2004, domestic oil and gas production from
``marginal'' properties was exempt from the 100-percent-of-net-income
limitation. The 2004 tax relief act extended the exemption to apply to
taxable years beginning after December 31, 2003 and before January 1,
2006.
Extend tax credit for producing electricity from certain renewable
sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-hour tax
credit, adjusted for inflation after 1992, for electricity produced from
wind,
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closed-loop biomass (organic material from a plant grown exclusively for
use at a qualified facility to produce electricity), and poultry waste.
To qualify for the credit, the electricity must be sold to an unrelated
third party and, under prior law, had to be produced during the first 10
years of production at a facility placed in service before January 1,
2004. The 2004 tax relief act extended the credit for two years, to
apply to electricity produced at facilities placed in service before
January 1, 2006.
Extend expensing of brownfields remediation costs.--Taxpayers are
allowed to elect to treat certain environmental remediation expenditures
that would otherwise be chargeable to a capital account as deductible in
the year paid or incurred. The 2004 tax relief act extended this
provision, which expired with respect to expenditures paid or incurred
after December 31, 2003, to apply to expenditures paid or incurred
before January 1, 2006.
Extend provisions permitting disclosure of tax return information
relating to terrorist activity.--Prior law permitted disclosure of tax
return information relating to terrorism in two situations. The first
was when an executive of a Federal law enforcement or intelligence
agency had reason to believe that the return information was relevant to
a terrorist incident, threat or activity and submitted a written
request. The second was when the Internal Revenue Service (IRS) wished
to apprise a Federal law enforcement agency of a terrorist incident,
threat or activity. The 2004 tax relief act extended this disclosure
authority, which expired on December 31, 2003, through December 31,
2005.
AMERICAN JOBS CREATION ACT OF 2004
The American Jobs Creation Act of 2004 (2004 jobs creation act) was
signed by President Bush on October 22, 2004. This Act repealed the
extraterritorial income exclusion of prior law, which had been declared
a prohibited export subsidy by the World Trade Organization. This Act
also provided a deduction against domestic manufacturing income,
provided certain tax relief to U.S. businesses and industries, reformed
and simplified the taxation of overseas operations of U.S. multinational
firms, reformed the Federal tobacco subsidy program, provided a
temporary itemized deduction for State and local general sales taxes,
and included revenue-raising provisions. The major provisions of this
Act that affect receipts are described below.
Extraterritorial Income
Repeal exclusion for extraterritorial income (ETI).--Under the ETI
provisions of prior law, certain income attributable to foreign trading
gross receipts was excluded from gross income for U.S. tax purposes. The
2004 jobs creation act repealed the ETI provisions, effective for
transactions after December 31, 2004. Certain transitional tax rules
apply to transactions occurring in 2005 and 2006, providing taxpayers
with 80 percent and 60 percent, respectively, of the tax benefit that
would have been otherwise allowable under the prior law ETI provisions.
Moreover, the ETI provisions of prior law remain in effect for
transactions in the ordinary course of a trade or business if such
transactions are pursuant to a binding contract between the taxpayer and
an unrelated person and the contract was in effect on September 17, 2003
and at all times thereafter.
Provide deduction for domestic manufacturing.--The 2004 jobs creation
act provided a deduction equal to a portion of the taxpayer's qualified
production activities income, phased in over six years. When fully
effective for taxable years beginning after 2009, the deduction would be
nine percent (three percent for taxable years 2005 and 2006 and six
percent for taxable years 2007, 2008, and 2009) of the lesser of: (1)
qualified production activities income for the taxable year; or (2)
taxable income (determined without regard to the deduction) for the
year. However, the deduction for a taxable year generally is limited to
an amount equal to 50 percent of W-2 wages of the employer for the
taxable year.
In general, qualified production activities income equals domestic
production gross receipts in excess of: (1) the cost of goods sold that
are allocable to such receipts; (2) other deductions, expenses, or
losses directly allocable to such receipts; and (3) a proper share of
other deductions, expenses, and losses that are not directly allocable
to such receipts or another class of income. Domestic production gross
receipts generally are gross receipts derived from: (1) any sale, lease,
rental, license, exchange, or other disposition of (a) qualifying
production property (generally any tangible personal property, computer
software or sound recordings) manufactured, produced, grown, or
extracted by the taxpayer in whole or in significant part within the
United States; (b) any qualified film produced by the taxpayer
(generally any motion picture film or videotape for which 50 percent or
more of the total compensation relating to the production of such film
is for specified services performed in the United States); and (c)
electricity, natural gas, or potable water produced by the taxpayer in
the United States; (2) construction activities performed in the United
States; or (3) engineering or architectural services performed in the
United States for construction projects in the United States. In
general, domestic production gross receipts do not include any receipts
derived from: (1) the sale of food or beverages prepared at a retail
establishment; (2) the transmission or distribution of electricity,
natural gas, or potable water; or (3) the leasing, licensing, or rental
of property used by a related person.
Business Tax Incentives
Extend temporarily increased expensing for small businesses.--In lieu
of depreciation, a small business taxpayer may elect to deduct up to
$25,000
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of the cost of qualifying property placed in service during the taxable
year. Qualifying property includes certain tangible property acquired by
purchase for use in the active conduct of a trade or business. The
amount that a taxpayer can expense is reduced by the amount by which the
taxpayer's cost of qualifying property exceeds $200,000. The deduction
is also limited in any taxable year by the amount of taxable income
derived from the active conduct by the taxpayer of any trade or
business. An election to expense these costs generally must be made on
the taxpayer's original return for the taxable year to which the
election relates, and can be revoked only with the consent of the IRS
Commissioner. Effective for taxable years 2003 through 2005, the 2003
jobs and growth tax cut: (1) increased the maximum deduction to
$100,000; (2) increased the annual investment limit to $400,000; (3)
expanded the definition of qualifying property to include off-the-shelf
computer software; and (4) allowed taxpayers to make or revoke expensing
elections on amended returns without the consent of the IRS
Commissioner. The 2003 jobs and growth tax cut also provided for the
indexation of the maximum deduction amount and investment limit,
effective for taxable years beginning after 2003 and before 2006. The
2004 jobs creation act extended for two years, effective for taxable
years 2006 and 2007, the changes provided in the 2003 jobs and growth
tax cut.
Modify recovery period for depreciation of certain leasehold
improvements.--A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time through
annual deductions for depreciation or amortization. Tangible property
generally is depreciated under the modified accelerated cost recovery
system (MACRS). Under this system, depreciation is determined by
applying specified recovery periods, placed-in-service conventions, and
depreciation methods to the cost of various types of depreciable
property. Depreciation allowances for improvements made on leased
property are determined under MACRS, even if the recovery period
assigned to the property is longer than the term of the lease.
Therefore, if the leasehold improvement constitutes an addition or
improvement to nonresidential real property, the improvement is
depreciated using the straight-line method over a 39-year recovery
period, beginning at the midpoint of the month the addition or
improvement was placed in service. The 2004 jobs creation act reduced
the recovery period for qualified leasehold improvement property from 39
years to 15 years, effective for such property placed in service after
October 22, 2004 and before January 1, 2006. For purposes of this
provision, qualified leasehold improvement property is defined as any
improvement to an interior portion of a building that is nonresidential
real property: (1) made under or pursuant to a lease either by the
lessee (or sublessee) or by the lessor of that portion of the building
occupied exclusively by the lessee (or sublessee), and (2) placed in
service more than three years after the date the building was first
placed in service. Qualified leasehold improvement property does not
include any improvement for which the expenditure is attributable to the
enlargement of the building, any elevator or escalator, any structural
component benefiting a common area, or the internal structural framework
of the building.
Modify recovery period for depreciation of certain restaurant
improvements.--Under MACRS, the cost of nonresidential real property is
depreciated using the straight-line method over a 39-year recovery
period. The 2004 jobs creation act reduced the recovery period for
qualified restaurant property to 15 years, effective for such property
placed in service after October 22, 2004 and before January 1, 2006. For
purposes of this provision, qualified restaurant property is defined as
any improvement to a building if (1) such improvement is placed in
service more than three years after the date such building was first
placed in service and (2) more than 50 percent of the building's square
footage is devoted to the preparation of, and seating for on-premises
consumption of, prepared meals.
Modify income forecast method of depreciation.--Under the income
forecast method, a property's depreciation deduction for a taxable year
is determined by multiplying the adjusted basis of the property
(determined before adjustments for depreciation) by a fraction, the
numerator of which is the income generated by the property during the
year and the denominator of which is the total forecasted or estimated
income expected to be generated prior to the close of the tenth taxable
year after the year the property was placed in service. Any costs that
are not recovered by the end of the tenth taxable year after the
property was placed in service may be taken into account as depreciation
in such year. The cost of certain motion picture films, sound
recordings, copyrights, books, and patents are eligible to be recovered
using the income forecast method. The 2004 jobs creation act stated
that, solely for purposes of computing the allowable deduction for
property under the income forecast method of depreciation,
participations and residuals may be included in the adjusted basis of
the property beginning in the year such property is placed in service,
but only if such participations and residuals relate to income to be
derived from the property before the close of the tenth taxable year
following the year the property is placed in service. Participations and
residuals are defined as costs the amount of which, by contract, varies
with the amount of income earned in connection with such property. This
act also stated that: (1) the amount of income from the property to be
taken into account under the income forecast method is the gross income
from such property (disregarding distribution costs), and (2) on a
property-by-property basis, the taxpayer may deduct the costs of
participations and residuals as they are paid, rather than accounting
for them as a capitalized cost under the income forecast method. These
changes were effective for property placed in service after October 22,
2004.
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Reform and simplify taxation of S Corporations.--In general, S
corporations do not pay Federal income tax. Instead, an S corporation
passes through its items of income and loss to its shareholders. Each
shareholder separately accounts for his or her share of these items on
his or her individual income tax return. A small business corporation
(except those designated ineligible under current law) may elect to be
an S corporation with the consent of all its shareholders, and may
terminate its election with the consent of shareholders holding more
than 50 percent of the stock. Under prior law, a small business
corporation was defined as a domestic corporation with only one class of
stock and no more than 75 shareholders, all of whom were individuals
(and certain trusts, estates, charities, and qualified retirement plans)
and citizens or residents of the United States. For purposes of the 75
shareholder limitation, a husband and wife were treated as one
shareholder. Ineligible small businesses included financial institutions
using the reserve method of accounting for bad debts, insurance
companies, corporations electing the benefits of the Puerto Rico and
possessions tax credit, and Domestic International Sales Corporations
(DISCs) or former DISCs. The 2004 jobs creation act contained a number
of provisions, generally effective for taxable years beginning after
December 31, 2004, that eased S corporation eligibility requirements and
affected the tax treatment of some S corporation shareholders. Major
changes: (1) increased the limitation on the number of shareholders from
75 to 100; (2) allowed all members of a family to be treated as one
shareholder for purposes of the limitation on the number of
shareholders; (3) allowed an individual retirement account (IRA) to be a
shareholder of a bank S corporation, but only to the extent of stock
held on October 22, 2004; (4) provided for the transfer of suspended
losses when stock in an S corporation is transferred between spouses or
as part of a divorce; and (5) required the filing of information returns
by qualified subchapter S subsidiaries.
Repeal certain excise taxes on rail diesel fuel and inland waterway
barge fuels.--Under prior law, diesel fuel used in trains and fuels used
in barges operating on the designated inland waterways system were
subject to a permanent 4.3-cents-per-gallon excise tax that was
deposited in the General Fund of the Treasury. Under the 2004 jobs
creation act, this tax declined to 3.3 cents per gallon on January 1,
2005, will decline to 2.3 cents per gallon on July 1, 2005, and will be
repealed effective January 1, 2007.
Provide tax credit for railroad track maintenance.--The 2004 jobs
creation act provided a 50-percent business tax credit for qualified
expenditures incurred by eligible taxpayers for railroad track
maintenance. The credit, which is effective for expenditures paid or
incurred during taxable years beginning after December 31, 2004 and
before January 1, 2008, is limited to the product of $3,500 times the
number of miles of railroad track owned or leased by an eligible
taxpayer as of the close of the taxable year. Qualified expenditures are
amounts expended for maintaining railroad track (including roadbed,
bridges, and related track structures) owned or leased as of January 1,
2005, by eligible taxpayers. Eligible taxpayers include: (1) certain
types of railroads and (2) a person who transports property using the
rail facilities of such railroads, or anyone who furnishes railroad-
related property or services to such a person.
Suspend temporarily occupational taxes related to distilled spirits,
wine and beer.--Special occupational taxes are imposed on producers and
others engaged in the marketing of distilled spirits, wine, and beer.
These taxes are payable annually, on July 1 of each year. Under the 2004
jobs creation act, these occupational taxes were suspended for the
three-year period, July 1, 2005 through June 30, 2008.
Tax Relief for Agriculture and Small Manufacturers
Restructure incentives for alcohol-blended fuels.--Under prior law an
income tax credit and an excise tax exemption were provided for ethanol
and renewable source methanol used as a fuel. In general, the income tax
credit for ethanol was 52 cents per gallon, but small ethanol producers
(those producing less than 30 million gallons of ethanol per year)
qualified for a credit of 62 cents per gallon on the first 15 million
gallons of ethanol produced in a year. A credit of 60 cents per gallon
was allowed for renewable source methanol. As an alternative to the
income tax credit, blenders of alcohol fuels could claim a gasoline tax
exemption of 52 cents for each gallon of ethanol and 60 cents for each
gallon of renewable source methanol blended into qualifying gasohol. The
rates for the ethanol income tax credit and exemption were each reduced
by 1 cent per gallon in 2005. The income tax credit was scheduled to
expire on December 31, 2007 and the excise tax exemption was scheduled
to expire on September 30, 2007. Neither the credit nor the exemption
applied during any period in which motor fuel taxes dedicated to the
Highway Trust Fund were limited to 4.3 cents per gallon.
Under prior law, 2.5 cents per gallon of the tax on alcohol-blended
fuels was retained in the General Fund of the Treasury, 0.1 cent per
gallon was deposited in the Leaking Underground Storage Tank (LUST)
Trust Fund, and the balance of the reduced rate was deposited in the
Highway Trust Fund.
The incentives for alcohol-blended fuels provided under prior law were
restructured under the 2004 jobs creation act. The major changes
provided in the act: (1) repealed the gasoline excise tax exemption for
most alcohol-blended fuels, thereby levying the full amount of the
gasoline excise tax on alcohol-blended fuels sold or used after December
31, 2004; (2) replaced the gasoline excise tax exemption for alcohol-
blended fuels with two refundable excise tax credits (the alcohol fuel
mixture credit and the biodiesel mixture credit), to be paid
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from the General Fund of the Treasury rather than from the Highway Trust
Fund; (3) provided that the full amount of the excise tax on alcohol-
blended fuels (except for the 0.1 cent per gallon deposited in the LUST
Trust Fund) is deposited in the Highway Trust Fund, effective for fuels
sold or used after September 30, 2004; (4) extended the prior law income
tax credit for alcohol-blended fuels through December 31, 2010; and (5)
provided a new income tax credit for biodiesel fuel and biodiesel fuel
mixtures. The refundable alcohol fuel mixture excise tax credit,
effective for fuels sold or used after December 31, 2004 and before
January 1, 2011, is 51 cents for each gallon of ethanol (60 cents for
each gallon of renewable source methanol) used by a taxpayer in
producing an alcohol fuel mixture. The refundable biodiesel mixture
excise tax credit, effective for fuels sold or used after December 31,
2004 and before January 1, 2007, is 50 cents for each gallon of
biodiesel fuel ($1.00 for each gallon of agri-biodiesel fuel) used by a
taxpayer in producing a qualified biodiesel fuel mixture. The income tax
credit for biodiesel fuel and biodiesel fuel mixtures is effective for
fuels sold or used after December 31, 2004 and before January 1, 2007,
and is 50 cents for each gallon of biodiesel fuel ($1.00 for each gallon
of agri-biodiesel fuel) that the taxpayer uses as fuel, sells at retail
and places in the fuel supply tank of the customer's vehicle, or uses in
producing a qualified biodiesel fuel mixture.
Provide tax incentives for agriculture.--The 2004 jobs creation act
provided a number of tax incentives to taxpayers engaged in the
agriculture business, which included: (1) special rules for the
recognition of gain from the sale of livestock sold on account of
drought, flood, or other weather-related conditions; (2) modifications
allowing the small producer ethanol tax credit to be passed through to
members of a cooperative; (3) extension of income averaging to taxpayers
engaged in the trade or business of fishing; (4) AMT relief for farmers
and fishermen using income averaging; and (5) expensing of up to $10,000
of qualified reforestation expenditures.
Provide tax incentives for small manufacturers.--The 2004 jobs
creation act provided a number of tax incentives to small manufacturers,
which included: (1) modification of the treatment of net income from
publicly traded partnerships as qualifying income for regulated
investment companies; (2) simplification of the excise tax imposed on
bows and arrows (with further modifications provided in legislation
modifying the taxation of arrows and bows signed by the President on
December 23, 2004); (3) reduction of the excise tax imposed on fishing
tackle boxes from ten percent to three percent; (4) repeal of the three-
percent excise tax imposed on sonar devices suitable for finding fish;
(5) extension of the placed in service date for bonus depreciation for
certain aircraft; (6) expensing and credits allowed with respect to
qualifying capital costs incurred by small business refiners in
complying with the Highway Diesel Fuel Sulfur Control Requirements of
the Environmental Protection Agency; and (7) modification of the
qualified small issue bond capital expenditure limit.
Tax Reform and Simplification for U.S. Business
Modify foreign tax credit.--Subject to various limitations, U.S.
taxpayers may credit foreign taxes paid or accrued against U.S. tax on
foreign-source income. The 2004 jobs creation act made several changes
to the foreign tax credit rules. The major changes included the
following:
Modify foreign tax credit carryovers.--Under prior law, the
amount of creditable taxes paid or accrued in any taxable year
that exceeded the foreign tax credit limitation in that particular
year was permitted to be carried back to the two immediately
preceding taxable years and carried forward five taxable years and
credited to the extent that the taxpayer otherwise had excess
foreign tax credit limitation for those years. The 2004 jobs
creation act extended the excess foreign tax credit carryforward
period to ten years and limited the carryback period to one year.
In general, the extended carryforward period is effective for
excess foreign taxes that can be carried forward to any taxable
year ending after October 22, 2004; the shortened carryback period
is effective for excess foreign tax credits arising in taxable
years beginning after October 22, 2004.
Modify interest expense allocation rules.--To determine taxable
income for foreign tax credit limitation purposes, a taxpayer must
allocate and apportion deductions between U.S.-source and foreign-
source income. Interest expense of a U.S. affiliated group is
allocated and apportioned between U.S.-source and foreign-source
income based on the group's total U.S. and foreign assets. All
members of a U.S.-affiliated group of corporations generally are
treated as a single corporation and allocation of interest expense
is made on the basis of the assets of such members, ignoring the
debt and interest expense of foreign subsidiaries. The 2004 jobs
creation act modified the interest allocation rules by providing a
one-time election. Under the election, foreign-source income would
be determined by allocating and apportioning interest expense in
an amount equal to the excess (if any) of (1) the worldwide
affiliated group's total interest expense multiplied by the ratio
of foreign assets of the worldwide affiliated group to total
assets, over (2) the interest expense of foreign members of the
worldwide affiliated group. These changes in the interest expense
allocation rules are effective for taxable years beginning after
December 31, 2008.
Recharacterize overall domestic loss.--A taxpayer's losses from
foreign sources in excess of income from foreign sources (an
overall foreign loss, or OFL) may offsets U.S.-source taxable
income, thereby reducing the effective tax rate on
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U.S.-source income. To address this consequence, to the extent
that an OFL offsets U.S.-source taxable income, foreign-source
income in succeeding years must be recharacterized as U.S.-source
income for foreign tax credit limitation purposes. This OFL
recapture rule has the effect of reducing the foreign tax credit
limitation in one or more years following an OFL year, thereby
reducing the amount of U.S. tax that can be offset by the foreign
tax credit in those years. Under prior law, there was no
symmetrical treatment for overall domestic losses that offset
foreign source income in a taxable year. The 2004 jobs creation
act provided that to the extent U.S.-source losses offset foreign-
source taxable income, U.S.-source income in succeeding years is
recharacterized as foreign-source income for foreign tax credit
limitation purposes in a manner similar to the OFL recapture
rules. These changes with respect to overall domestic losses are
effective for taxable years beginning after December 31, 2006.
Apply look-through approach to dividends paid by a 10/50
company.--Special rules apply in the case of dividends received
from a foreign corporation in which the taxpayer owns at least 10
percent of the stock by vote and which is not a controlled foreign
corporation (a ``10/50 company''). Under prior law, dividends paid
by a 10/50 company out of earnings and profits accumulated in
taxable years after December 31, 2002 received ``look-through''
treatment based on the character of the underlying earnings. In
contrast, dividends paid by a 10/50 company out of earnings and
profits accumulated in taxable years before January 1, 2003 were
subject to special basket rules. Effective for taxable years
beginning after December 31, 2002, the 2004 jobs creation act
generally applied the look-through approach to dividends paid by a
10/50 company, regardless of the year in which the earnings and
profits out of which the dividends were paid were accumulated.
Consolidate foreign tax credit categories of income.--Under
prior law, the foreign tax credit limitation rules were applied
separately for nine statutory limitation categories or
``baskets.'' Effective for taxable years beginning after December
31, 2006, the 2004 jobs creation act generally reduced the number
of foreign tax credit limitation categories from nine to two, with
the foreign tax credit limitation rules applied separately to
passive income and general income.
Provide AMT relief.--Taxpayers are permitted to reduce their AMT
liability by an AMT foreign tax credit. Under prior law, the AMT
foreign tax credit was limited to 90 percent of the pre-credit
AMT. The 2004 jobs creation act repealed the 90-percent limitation
on the use of the AMT foreign tax credit, effective for taxable
years beginning after December 31, 2004.
Modify subpart F rules.--Subpart F rules require U.S. shareholders
with a 10-percent or greater interest in a controlled foreign
corporation (CFC) to currently include in income for U.S. tax purposes
their pro-rata share of the subpart F income of the CFC, whether or not
such income is currently distributed to the shareholders. The 2004 jobs
creation act made changes to the subpart F rules, generally effective
for taxable years beginning after December 31, 2004. Principal changes
included the following: (1) The exceptions to the definition of U.S.
property were expanded to include: (a) securities acquired and held by a
CFC in the ordinary course of its trade or business as a dealer in
securities and (b) obligations acquired by the CFC from a U.S. person
who is not a domestic corporation and is not a U.S. shareholder of the
CFC or a partnership, estate, or trust in which the CFC or any related
person is a partner, beneficiary or trustee. (2) In general, the sale of
a partnership interest by a CFC would be treated as a sale of a
proportionate share of partnership assets attributable to such interest.
(3) The requirements for gains or losses on commodities hedging
transactions to be excluded from the definition of foreign personal
holding company income were modified. (4) The temporary exceptions from
foreign personal holding company income and foreign base company
services income provided for active financing income were modified. (5)
The subpart F rules relating to foreign base company shipping income
were repealed, and a safe harbor was provided to treat certain rents
derived from leasing an aircraft or vessel in foreign commerce as active
income. (6) For purposes of the exception to the definition of U.S.
property, ``banking business'' was defined. In addition, the anti-
deferral rules applicable to foreign personal holding companies and to
foreign investment companies were repealed; various other anti-deferral
rules were consolidated and modified.
Provide incentive to reinvest foreign earnings in the United States.--
Income from foreign operations conducted by foreign corporate
subsidiaries generally is subject to U.S. tax when the income is
distributed as a dividend to the domestic corporation. Until such
repatriation, the U.S. tax on such income generally is deferred. Under
the 2004 jobs creation act, certain dividends received by a U.S.
corporation from controlled foreign corporations were provided an 85-
percent dividends-received deduction. Various restrictions apply to
determine whether dividends are eligible for the deduction, including a
requirement that the funds be invested in the United States. At the
taxpayer's election, the deduction is available for dividends received
either during the taxpayer's first taxable year beginning on or after
October 22, 2004, or during the taxpayer's last taxable year beginning
before such date. Dividends received after the election period will be
taxed in the normal manner under present law.
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State and Local General Sales Taxes
Provide optional temporary deduction for State and local general sales
taxes.--An itemized deduction is permitted for certain State and local
taxes, including individual income taxes, real property taxes, and
personal property taxes. Under prior law, a deduction was not provided
for State and local general sales taxes (a tax imposed at one rate with
respect to the sale at retail of a broad range of classes of items).
Under the 2004 jobs creation act, effective for taxable years beginning
after December 31, 2003 and before January 1, 2006, a taxpayer would be
allowed to elect to take an itemized deduction for State and local
general sales taxes in lieu of the itemized deduction for State and
local income taxes. The allowable deduction could be determined by
tallying the amount of general State and local sales taxes paid on
accumulated receipts, or from tables prescribed by the Secretary of the
Treasury. A taxpayer tallying the amount of taxes paid would be able to
include taxes imposed at one rate on the sale at retail of a broad range
of classes of items, as well as taxes imposed at a lower rate on the
sale at retail of food, clothing, medical supplies, and motor vehicles.
Taxes imposed at a higher rate on the sale of motor vehicles would be
deductible, but only up to the amount that would have been imposed at
the general sales tax rate. The tables prescribed by the Secretary of
the Treasury would be based on the average consumption of taxpayers on a
State-by-State basis and would take into account filing status, number
of dependents, adjusted gross income, and rates of State and local
general sales taxes. Taxpayers who used the tables would be allowed to
add to the table amounts general sales taxes paid with respect to
purchases of motor vehicles, boats, and other items specified by the
Secretary that would not be reflected in the tables.
Tobacco Reform
Reform the tobacco program.--Under prior law, the Federal tobacco
program had two main components: a supply management component and a
price support component. The supply management component limited and
stabilized the quantity of tobacco marketed by farmers through marketing
quotas. Because marketing quotas alone could not always guarantee
tobacco prices, Federal support prices were established and guaranteed
through the mechanism of nonrecourse loans available on each farmer's
marketed crop. In 1982 legislation was enacted to ensure that the
nonrecourse loan program was run at no-net-cost to the Federal
government.
The 2004 jobs creation act repealed all aspects of the Federal tobacco
program, effective for crop years beginning in 2005. Under the reformed
program, quota holders and producers of quota tobacco (owners,
operators, landlords, tenants, or sharecroppers who shared in the risk
of production) would be entitled to receive payments in exchange for the
termination of the quotas and price supports of prior law. A base quota
level would be established for each tobacco quota holder and each
producer. Eligible tobacco quota holders would receive $7 per pound on
their basic quota allotment, paid in equal installments over 10 years.
Eligible producers would receive $1 to $3 per pound, depending on the
extent of their quota-related activity in the 2002-2004 marketing years,
multiplied by their base quota level, paid in equal installments over 10
years.
Assessments would be imposed quarterly on each manufacturer and
importer of tobacco products sold in the United States, effective for
fiscal years 2005 through 2014. The assessments, which would be
sufficient to fund the payments to quota holders and producers and other
expenditures associated with the program, would be based on the class of
tobacco product (cigarettes, snuff, chewing tobacco, pipe tobacco, roll-
your-own tobacco and cigars) and market share.
Miscellaneous Provisions
Permit stock life insurance companies to make tax-free distributions
from policyholder surplus accounts.--Policyholder surplus accounts of
stock life insurance companies were established legislatively and
represent earnings of such companies that were untaxed under prior law.
Any direct or indirect distribution to shareholders from an existing
policyholder surplus account of a stock life insurance company is
subject to tax at the corporate rate in the taxable year of the
distribution. Any distribution to shareholders is treated as made: (1)
first out of the shareholder surplus account, to the extent thereof; (2)
then out of the policyholder surplus account, to the extent thereof; and
(3) finally, out of other accounts. A company may also elect to subtract
from its policyholder surplus account any amount as of the close of a
taxable year. For stock life insurance companies, the 2004 jobs creation
act temporarily suspended the taxation of distributions to shareholders
from an existing policyholder surplus account. The act also reversed the
order in which distributions reduce the various accounts, so that
distributions would be treated as: (1) first made out of the
policyholder surplus account, to the extent thereof; (2) then out of the
shareholder surplus account, to the extent thereof; and (3) lastly out
of other income. These changes were effective for taxable years
beginning after December 31, 2004 and before January 1, 2007.
Modify method of accounting for naval shipbuilding contracts.--
Taxpayers generally must use the percentage-of-completion method to
determine taxable income from long-term contracts. However, an exception
exists for certain ship construction contracts, which may be accounted
for using the 40/60 percentage-of-completion/capital cost method (PCCM).
Under the 40/60 PCCM, 40 percent of the taxpayer's long-term contract
income is subject to the percentage-of-completion method, the remaining
60 percent must be reported by consistently using the taxpayer's exempt
contract method. Permissible exempt contract methods include the
percentage of completion method, the exempt-con
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tract percentage-of-completion method, and the completed contract
method. The 2004 jobs creation act allowed qualified naval ship
contracts to be accounted for using the 40/60 PCCM during the first five
taxable years of the contract. The cumulative reduction in tax resulting
from the provision over the five-year period must be recaptured and
included in the taxpayer's tax liability in the sixth year. This change
was effective for contracts for which construction commenced after
October 22, 2004.
Defer gain on the disposition of electric transmission property.--Gain
on the sale or other disposition of property is ordinarily recognized in
the year of sale. The 2004 jobs creation act permitted the gain from
certain sales of electric transmission property to be recognized ratably
over eight years beginning with the year of sale, except to the extent
proceeds of the sale are not used to purchase replacement utility
property. To qualify for this treatment, the transmission property must
be sold to an independent transmission company after October 22, 2004
and before January 1, 2007, and the proceeds from the sale must be used
to purchase replacement utility property. To the extent the proceeds are
not used to purchase replacement utility property, gain is recognized in
the year of the sale.
Expand resources eligible for the tax credit for producing electricity
from certain sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-
hour tax credit, adjusted for inflation after 1992, for electricity
produced from wind, closed-loop biomass (organic material from a plant
grown exclusively for use at a qualified facility to produce
electricity), and poultry waste. To qualify for the credit under prior
law, the electricity had to be sold to an unrelated third party and had
to be produced during the first 10 years of production at a qualified
facility placed in service before January 1, 2006 and after December 31,
1999 for a poultry waste facility, after December 31, 1992 for a closed-
loop biomass facility and after December 31, 1993 for a wind energy
facility. Under the 2004 jobs creation act, the credit was expanded to
apply to electricity from closed-loop biomass produced at a facility
originally placed in service before December 31, 1992 and modified to
use closed-loop biomass to co-fire with coal, other biomass, or coal and
other biomass before January 1, 2006. The credit for electricity
produced by such facilities would be equal to the otherwise allowable
credit multiplied by the ratio of the thermal content of the closed-loop
biomass fuel burned in the facility to the thermal content of all fuels
burned in the facility. The 2004 jobs creation act also expanded the
credit to apply to the following new qualifying sources: (1) open-loop
biomass (other than agricultural livestock waste nutrients) used at a
facility placed in service before January 1, 2006; (2) municipal solid
waste, agricultural livestock waste nutrients, geothermal energy, solar
energy, small irrigation power, landfill gas, and trash combustion used
at a qualifying facility placed in service after October 22, 2004 and
before January 1, 2006; and (3) refined coal produced at a qualifying
facility placed in service after October 22, 2004 and before January 1,
2009. For facilities using open-loop biomass, including agricultural
livestock waste nutrients, geothermal energy, solar energy, small
irrigation power, landfill gas, or trash combustion, the credit period
was reduced from ten years to five years and (except for geothermal
energy and solar energy) the credit rate was reduced by half. Facilities
using refined coal could claim the credit at a rate of $4.375 per ton
(indexed for inflation).
Revenue Provisions
Modify tax treatment of corporate inversions.--The 2004 jobs creation
act addressed ``inversion transactions,'' which occur when a U.S.
corporation reincorporates in a foreign jurisdiction and replaces the
U.S. parent corporation of a multinational corporate group with a
foreign parent corporation. The 2004 jobs creation act included
provisions that addressed two types of inversion transactions. These
changes generally applied to taxable years ending after March 4, 2003,
effective for companies (and certain partnerships) inverting after that
date:
Inversions with at least 80 percent identity of stock
ownership.--An inverting company generally would continue to be
taxed as a U.S. company (that is, the inversion essentially would
be disregarded) if: (1) it acquired substantially all the property
of a U.S. corporation, (2) 80 percent or more of its stock was
held by former shareholders of the U.S. corporation, and (3) its
``expanded affiliated group'' did not have substantial business
activities in the country in which it was organized.
Inversions with at least 60 percent (but less than 80 percent)
identity of stock ownership.--Any inversion gain recognized by an
inverting U.S. company generally would be taxed and the use of tax
attributes such as net operating losses (NOLs) and foreign tax
credits would be limited if: (1) it acquired substantially all the
property of a U.S. corporation, (2) 60 percent or more of its
stock was held by former shareholders of the U.S. corporation and
(3) its ``expanded affiliated group'' did not have substantial
business activities in the country in which it was organized.
Revise taxation of individuals who relinquish U.S. citizenship or
terminate long-term residency.--An individual who gives up U.S.
citizenship or terminates long-term U.S. residency to avoid tax is
subject to an alternative tax regime for 10 years following loss of
citizenship or termination of residency. The 2004 jobs creation act: (1)
eliminated the subjective ``principal purpose'' standard and established
objective standards for determining whether former citizens or long-term
residents are subject to the alternative tax regime; (2) provided tax-
based rules for determining when an individual is no longer a U.S.
citizen or long-term resident; (3) imposed full U.S. taxation on
individuals subject to the alternative tax regime who return
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to the U.S. for extended periods; (4) imposed the U.S. gift tax on gifts
of stock of certain closely-held foreign corporations that hold U.S.-
situated property; and (5) required individuals subject to the
alternative tax regime to file an annual return. These changes applied
to individuals who relinquished citizenship or terminated residency
after June 3, 2004.
Combat abusive tax avoidance transactions.--Although the vast
majority of taxpayers and practitioners do their best to comply with the
law, some actively promote or engage in transactions structured to
generate tax benefits never intended by Congress. Such abusive
transactions harm the public fisc, erode the public's respect for the
tax laws, and consume limited IRS resources. The 2004 jobs creation act
contained several provisions designed to curtail the use of abusive tax
avoidance transactions. The major changes included: (1) the imposition
of new or increased penalties on taxpayers who fail to disclose listed
or reportable transactions, report an interest in a foreign financial
account, or accurately report a listed or reportable transaction; (2)
the imposition of new or increased penalties on tax shelter promoters
who make false or fraudulent claims to promote abusive tax avoidance
transactions, fail to maintain investor lists, or fail to disclose
listed or reportable transactions; (3) modification of actions to enjoin
conduct related to tax shelters and reportable transactions; (4)
expansion of the tax shelter exception for Federal practitioner
privilege to apply to all tax shelters; (5) extension of the statute of
limitations for unreported listed transactions; and (6) denial of a
deduction for interest paid or accrued on any portion of an underpayment
of tax attributable to an undisclosed listed transaction or an
undisclosed reportable avoidance transaction.
Modify taxation of partnerships.--Although a partnership is a tax-
reporting entity that must file an annual partnership return, a
partnership does not pay Federal income tax. Instead, income or loss
``flows through'' to the partners who are each taxed on their
distributive share of partnership taxable income. When filing their
Federal income tax return, each partner must take into account their
distributive share of certain items of partnership income, gain, loss,
deduction, or credit. A partner generally is not taxed on distributions
of cash or property received from the partnership, except to the extent
that any money distributed exceeds the partner's adjusted basis in his
partnership interest immediately before the distribution. Taxable gain
can also result from distributions of property that were contributed to
the partnership with a fair market value in excess of the adjusted basis
(property with a built-in gain) and from property distributions
characterized as sales and exchanges. The 2004 jobs creation act
included several provisions that affect the calculation and allocation
of partnership income and ownership interests. The major changes, which
generally were applicable with respect to contributions of property,
transfers of partnership interests and distributions of partnership
property after October 22, 2004, included the following:
Disallow certain partnership loss transfers and modify basis
adjustments.--Built-in losses with respect to contributed property
would be taken into account only by the contributing partner and
not by other partners. In determining the amount of items
allocated to partners other than the contributing partner, the
basis of the contributed property would be the fair market value
at the time of contribution. If the contributing partner's
partnership interest were transferred or liquidated, the
partnership's adjusted basis in the property would be based on the
fair market value at the time of contribution, and the built-in
loss would be eliminated.
Modify basis adjustment in stock held by a partnership in a
corporate partner.--In applying the basis allocation rules to a
distribution in liquidation of a partner's interest, a partnership
would be precluded from decreasing the basis of corporate stock of
a partner or a related person. Any decrease in basis that would
have otherwise been allocated to the stock would be allocated to
other partnership assets. If the decrease in basis exceeded the
basis of the other partnership assets, then the gain would be
recognized by the partnership in the amount of the excess.
Limit the transfer and importation of built-in losses.--The
basis of property with a net built-in loss imported into the U.S.
in a tax-free incorporation or reorganization from persons not
subject to U.S. tax would be its fair market value, thereby
eliminating the built-in loss.
Reform the tax treatment for leasing arrangements with tax-indifferent
parties.--Certain leasing arrangements (often referred to as sale-in/
lease-out or SILO arrangements) involving tax-indifferent parties
(including governments, charities, and foreign entities) do not provide
financing related to the construction, purchase or refinancing of
productive assets. Rather, they involve the payment of an accommodation
fee by a U.S. taxpayer to the tax-indifferent party in exchange for the
right of the U.S. taxpayer to claim tax benefits from the purported tax
ownership of the property. These arrangements usually result in no
change in the tax-indifferent party's use or operation of the property,
and are designed to ensure that the U.S. taxpayer bears only limited
economic risk. The U.S. taxpayer enjoys substantial current tax
deductions, while postponing the recognition of taxable income well into
the future. The 2004 jobs creation act limited a taxpayer's annual
deductions or losses related to a lease with a tax-indifferent party by:
(1) modifying the recovery period of certain property (qualified
technological equipment, computer software and certain intangibles)
leased to a tax-exempt entity to the longer of the property's assigned
class life or 125 percent of the lease term; (2) altering the definition
of lease term for all property leased to a tax-exempt entity to include
the time period
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a lessee is under a service contract or similar obligation period; and
(3) establishing rules to limit deductions associated with such leases
to the net income generated from the lease unless the lease meets
certain specified criteria. These rules generally were effective with
respect to leases entered into after March 12, 2004, and did not apply
to short-term leases of five or fewer years, with a modification for
short-term leases of qualified technological equipment. Disallowed
deductions could be carried forward and treated as deductions related to
the lease in the next taxable year, subject to the same limitations, or
taken when the taxpayer completely disposed of its interest in the
leased property. Indian tribes and their instrumentalities were added to
the definition of tax-exempt entities required to depreciate leased
property on a straight line basis over a recovery period equal to the
longer of the property's assigned class life or 125 percent of the lease
term.
Improve tax administration.--A number of provisions included in the
2004 jobs creation act improved tax administration. The major
provisions: (1) clarified the rules for payment of estimated tax with
respect to tax attributable to a deemed asset sale; (2) clarified that
the exclusion for gain on the sale or exchange of a principal residence
does not apply in cases where the principal residence was acquired in a
like-kind exchange in which any gain was not recognized within the prior
five years; (3) allowed taxpayers to deposit cash with the Internal
Revenue Service (IRS) that could subsequently be used to pay an
underpayment of income, gift, estate, generation-skipping, or certain
excise taxes; (4) authorized the IRS to enter into installment
agreements that provide for the partial payment of taxes owed; (5)
allowed the IRS to levy continuously up to 100 percent of Federal
payments to vendors; (6) modified the rules regarding suspension of
interest and penalties where the IRS fails to contact the taxpayer; (7)
clarified the residence and income source rules relating to U.S.
possessions; (8) expanded the prior law provision that disallowed a
deduction for interest on certain corporate convertible or equity-linked
debt; (9) prevented the mismatching of deductions for accrued interest
and original issue discount with their inclusion in income in
transactions with related foreign persons; and (10) permitted private
collection agencies to engage in specific, limited activities to support
IRS collection efforts.
Reduce fuel tax evasion.--A number of provisions included in the 2004
jobs creation act reduced fuel tax evasion. These provisions, which
generally were effective after October 22, 2004, included: (1)
codification of the exemption from certain excise taxes for mobile
machinery vehicles; (2) modification of the definition of an off-highway
vehicle; (3) modification of the point of taxation of aviation fuel from
the sale by a producer or importer to removal from a refinery or
terminal, or entry into the United States; (4) elimination of manual
dying of fuel and the imposition of penalties for violation of fuel
dying rules; (5) imposition of additional registration requirements on
bulk transfers of tax-exempt fuel by pipeline, vessel or barge; (6)
repeal of the installment method for payment of the heavy highway
vehicle use tax and the elimination of reduced rates for certain heavy
highway vehicles; and (7) expansion of taxable fuels to include transmix
and diesel fuel blend stocks.
Modify deductions for charitable contributions.--The 2004 jobs
creation act made several changes to prior law rules regarding allowable
deductions for donations of contributed property. The major changes
included the following:
Modify rules for donations of patents and other intellectual
property.--In the initial year of a contribution of a patent or
other intellectual property (other than certain copyrights or
inventory), the allowable deduction would be limited to the lesser
of the taxpayer's basis in the donated property or the fair market
value of the property. In addition, in that year and in future
years, additional amounts could be deducted based on a specified
percentage of the amount of royalties or other revenue, if any,
actually received by the donee charity from the donated property.
These additional deductions would be allowed only to the extent
that the aggregate of the amounts calculated exceeded the amount
of the deduction claimed in the initial year of the contribution.
No additional deductions would be permitted after the expiration
of the legal life of the patent or intellectual property, or after
the tenth anniversary of the date the contribution was made. This
change was effective for contributions made after June 3, 2004.
Limit deductions for charitable contributions of vehicles.--
Under prior law, taxpayers generally were permitted to deduct the
fair market value of donated vehicles, regardless of whether the
vehicle was actually used for a charitable purpose or resold with
the charity receiving some revenue from the sale. Under the 2004
jobs creation act, the amount of deduction for charitable
contributions of vehicles (generally including automobiles, boats,
and airplanes for which the claimed value exceeded $500 and
excluding inventory property) would depend upon the use of the
vehicle by the donee organization. For vehicles sold by the donee
organization without any significant intervening use or material
improvement, the amount of the deduction could not exceed the
gross proceeds from the sale. Deductions in excess of $500 would
have to be substantiated by a contemporaneous written
acknowledgement by the donee. Strict penalties would be levied on
donee organizations knowingly furnishing false or fraudulent
acknowledgements. These changes were effective for contributions
made after December 31, 2004.
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Require increased reporting for noncash charitable
contributions.--Under prior law, any individual, closely-held
corporation, personal service corporation, or S corporation
claiming a charitable contribution deduction for a contribution of
property (other than publicly-traded securities) of more than
$5,000 ($10,000 in the case of nonpublicly traded stock) was
required to obtain a qualified appraisal for the property. The
2004 jobs creation act extended this requirement to all
corporations. In addition, the act required that all taxpayers
(whether an individual, a partnership, or a corporation) provide a
copy of the appraisal to the IRS for deductions claimed in excess
of $500,000. The change was effective for contributions made after
June 3, 2004.
Modify treatment of nonqualified deferred compensation plans.--Under
prior law, the determination of when amounts deferred under a
nonqualified deferred compensation arrangement were includible in the
gross income of the individual earning the compensation depended on the
facts and circumstances of the arrangement. If the arrangement was
unfunded, the compensation generally was includible in income when it
was actually or constructively received. If the arrangement was funded,
then income was includible for the year in which the individual's rights
were transferable or not subject to a substantial risk of forfeiture.
Under the 2004 jobs creation act, all amounts deferred under a
nonqualified deferred compensation plan are currently includible in the
gross income of the individual earning the compensation to the extent
not subject to a substantial risk of forfeiture and not previously
included in gross income, unless certain requirements are satisfied.
Such requirements include permissible timing for deferral elections and
distributions of deferred amounts. If the requirements are not
satisfied, interest at the underpayment rate plus one percentage point
will be imposed on the underpayments that would have occurred had the
compensation been includible in income when first deferred, or if later,
when not subject to a substantial risk of forfeiture. In addition, the
amount required to be included in income will be subject to a 20-pecent
additional tax. These changes apply with respect to amounts deferred in
taxable years beginning after December 31, 2004.
Modify list of taxable vaccines.--A manufacturer's excise tax is
imposed at the rate of 75 cents per dose on the following vaccines
routinely recommended for administration to children: diphtheria,
pertussis, tetanus, measles, mumps, rubella, polio, haemophilus
influenza type B, hepatitis B, chicken pox, rotavirus gastroenteritis,
and streptococcus pneumoniae. The tax applied to any vaccine that is a
combination of vaccine components equals 75 cents times the number of
components in the combined vaccine. Amounts equal to net revenue from
the excise tax are deposited in the Vaccine Injury Compensation Trust
Fund to finance compensation awards under the Federal Vaccine Injury
Compensation Program for individuals who suffer certain injuries
following administration of the taxable vaccines. The 2004 jobs creation
act added any vaccine against hepatitis A and any trivalent vaccine
against influenza to the list of taxable vaccines.
Extend IRS user fees.--The IRS has authority to charge fees for
written responses to questions from individuals, corporations, and
organizations related to their tax status or the effects of particular
transactions for tax purposes. The 2004 jobs creation act extended
authority for these fees, which had expired effective with requests made
after December 31, 2004, through September 30, 2014.
Establish specific class lives for utility grading costs.--A taxpayer
is allowed a depreciation deduction for the exhaustion, wear and tear,
and obsolescence of property that is used in a trade or business or held
for the production of income. For most tangible property placed in
service after 1986, the amount of the depreciation deduction is
determined under MACRS using a statutorily prescribed depreciation
method, recovery period, and placed in service convention. Under prior
law, the cost of initially clearing and grading land improvements were
depreciated over a seven-year recovery period under MACRS as assets for
which no class life was provided. Under the 2004 jobs creation act,
depreciable clearing and grading costs incurred to locate transmission
and distribution lines and pipelines were assigned recovery periods of
20 years for electric utilities and 15 years for gas utilities. These
changes were effective for property placed in service after October 22,
2004.
Modify treatment of start-up and organizational expenditures.--Under
prior law, at the election of the taxpayer, start-up and organizational
expenditures could be amortized over a period of not less than 60
months, beginning with the month in which the trade or business began.
The 2004 jobs creation act allowed a taxpayer to elect to deduct up to
$5,000 of start-up and $5,000 of organizational expenditures in the
taxable year in which the trade or business began. However, each $5,000
amount was reduced (but not below zero) by the amount by which the
cumulative cost of start-up and organizational expenditures exceeded
$50,000, respectively. Start-up and organization expenditures that were
not deductible in the year in which the trade or business began would be
amortized over a 15-year recovery period. The change was effective for
start-up and organizational expenditures incurred after October 22,
2004. Start-up and organizational expenditures incurred on or before
October 22, 2004 would continue to be eligible to be amortized over a
period not less than 60 months. However, all start-up and organizational
expenditures related to a particular trade or business, whether incurred
before or after October 22, 2004, would be considered in determining
whether the cumulative cost of start-up or organizational expenditures
exceeded $50,000.
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Limit deduction for certain entertainment expenses.--In general,
deductions are not allowed with respect to an activity generally
considered to be entertainment, amusement or recreation, unless the
taxpayer establishes that the item was directly related to (or, in
certain cases, associated with) the active conduct of the taxpayer's
trade or business, or a facility (such as an airplane) used in
connection with such activity. However, under prior law, this general
entertainment expense disallowance rule did not apply to entertainment
expenses for goods, services, and facilities to the extent that the
expenses were (1) reported by the taxpayer as compensation and wages to
an employee, or (2) includible in the gross income of a recipient who
was not an employee as compensation for services rendered or as a prize
or award. For specified individuals (officers, directors, and 10-
percent-or-greater owners of private and publicly-held companies), the
2004 jobs creation act disallowed the deduction, to the extent that such
expenses exceeded the amount treated as compensation or includible in
income for the individual, with respect to expenses for (1) nonbusiness
activity generally considered to be entertainment, amusement or
recreation, or (2) a facility used in connection with such activity.
This change was effective for such expenses incurred after October 22,
2004.
Limit expensing of sport utility vehicles.--Under prior law, taxpayers
purchasing a sport utility vehicle for business use could expense and
deduct up to $100,000 of the cost in the year the vehicle was placed in
service. The 2004 jobs creation act reduced the amount of expensing
allowed with respect to the cost of a sports utility vehicle from
$100,000 to $25,000. The change was effective for property placed in
service after October 22, 2004.
PENSION FUNDING EQUITY ACT OF 2004
This Act, which was signed by the President on April 10, 2004, made
changes to the Employee Retirement Income Security Act of 1974 (ERISA)
and the Internal Revenue Code that affect the operation of private
pension plans. The major provisions of the Act: (1) established a two-
year temporary replacement of the benchmark interest rate for
determining funding liabilities of private sector pension plans; (2)
established temporary alternative minimum funding standards that reduced
funding requirements for commercial airlines, steel companies, and
certain other employers; and (3) allowed certain multiemployer plans to
temporarily delay the amortization of specified losses. This Act also
contained a number of other provisions including: (1) modification of
the definition of a property and casualty insurance company and the
requirements for such companies to be eligible for tax-exempt status;
(2) repeal of the prior law provision requiring reductions in deductions
of mutual life insurance companies for policyholder dividends; and (3)
extension, through December 31, 2013, of the prior law provision that
allowed employers to transfer excess defined benefit plan assets to a
special account for health benefits of retirees.
UNITED STATES-AUSTRALIA FREE TRADE AGREEMENT IMPLEMENTATION ACT
This Act implemented the U.S.-Australia Free Trade Agreement (FTA), as
signed by the United States and Australia on May 18, 2004. The U.S.-
Australia FTA advanced U.S. economic interests by providing increased
access to Australia's markets for American services, manufactured goods,
and agricultural products. The Agreement, which will create jobs and
opportunities in both countries, solidified our relationship with an
important partner in the global economy and set a strong example of the
benefits of free trade and democracy.
UNITED STATES-MOROCCO FREE TRADE AGREEMENT IMPLEMENTATION ACT
This Act implemented the U.S.-Morocco FTA, as signed by the United
States and Morocco on June 15, 2004. The U.S.-Morocco FTA advanced U.S.
economic interests by providing increased access to Morocco's markets
for American manufactured goods, agricultural products, services, and
investment. The Agreement provided a significant opportunity to
encourage economic reform and development in a moderate Muslim nation
and was an important step in implementing the President's plan for a
broader U.S.-Middle East Free Trade Area.
THE AGOA ACCELERATION ACT OF 2004
The African Growth and Opportunity Act (AGOA), enacted in May 2000,
reduced barriers to trade, thereby increasing exports, creating jobs,
and increasing opportunities for Africans and Americans alike. It gave
American businesses greater confidence to invest in Africa, and
encouraged African nations to reform their economies and governments to
take advantage of the opportunities that AGOA provided. The AGOA
Acceleration Act, which was signed by the President on July 13, 2004,
built on that success by extending trade preferences for certain imports
from designated sub-Saharan African countries through September 30,
2015. The deadline for expiration of these benefits had been September
30, 2008 under prior law. The AGOA Acceleration Act also extended the
prior law deadline for use of third country fabric benefits from
September 30, 2004 to September 30, 2007. Under this provision, any AGOA
country with a per capita GNP less than $1,500 enjoys duty-free access
(subject to caps on the amount of imports as measured by square meter
equivalents) to the U.S. market for apparel made from fabric originating
anywhere in the world. This Act also expanded benefits by modifying
rules of origin for certain apparel components, such as collars and
cuffs, and expanded the scope of eligible goods to include ethnic
fabrics made on machines, rather than just those made by hand.
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THE MISCELLANEOUS TRADE AND TECHNICAL CORRECTIONS ACT OF 2004
This Act, which was signed by the President on December 3, 2004,
provided for the temporary suspension of tariffs on about 330 new items,
including a wide variety of chemicals, and a number of pigments and dyes
that are for the most part not made in the U.S. and needed by U.S.
manufacturers. This Act also extended suspensions of tariffs on a number
of items, refunded tariffs on specified imports, and made technical
corrections to several trade laws.
ADMINISTRATION PROPOSALS
REFORM THE FEDERAL TAX SYSTEM
On January 7, 2005, the President established an Advisory Panel on
Federal Tax Reform to develop options to improve the tax system. The
current tax system is complex, is perceived by many as unfair, and
distorts household and business decisions. The excessive time taxpayers
spend to understand and comply with the tax system is a burden and
wastes resources. Taxpayers spend an estimated six billion hours to
comply with the tax system at a cost of more than $100 billion annually.
Individuals and businesses need a tax system that is simpler, and easier
to understand and comply with. Faith in the fairness of our tax system
is undermined when taxpayers believe others can exploit the complexities
of the law to avoid paying tax. At the same time, Americans deserve a
tax code that will allow them to make decisions based more on economic
merit, free of the distortions generated by the tax system. The economic
costs associated with these distortions can total hundreds of billions
of dollars annually.
The Advisory Panel will broadly focus on revenue-neutral reforms that
make the tax system simpler, encourage economic growth, and promote
fairness, while recognizing the importance of homeownership and
charitable giving in American society. Information on the Advisory Panel
and its deliberations can be found at www.taxreformpanel.gov. The
Advisory Panel will provide options for reforming the tax system to the
Secretary of the Treasury no later than July 31, 2005. These options
will help the Treasury Secretary and others within the Administration
develop specific recommendations for the President.
Pending the outcome of fundamental tax reform, the President will
continue to propose important policy initiatives including permanent
extension of the increased expensing for small businesses and the
reductions in taxes on capital gains and dividends provided in the 2003
jobs and growth tax cut. The President's policy initiatives also include
permanent extension of the provisions of the 2001 tax cut scheduled to
sunset on December 31, 2010, permanent extension of the research and
experimentation tax credit, and extension of many other expiring
provisions. In addition, the President's initiatives include incentives
for charitable giving, strengthening education, investing in health
care, protecting the environment, increasing energy production, and
promoting energy conservation.
This Budget also includes proposals designed to increase opportunities
for saving by simplifying and rationalizing the many tax preferred
savings vehicles provided under current law, improve tax compliance,
curtail abusive tax avoidance activities, and strengthen the employer-
based pension system.
MAKE PERMANENT CERTAIN TAX CUTS ENACTED IN 2001 AND 2003
Extend permanently reductions in individual income taxes on capital
gains and dividends.--The maximum individual income tax rate on net
capital gains and dividends is 15 percent for taxpayers in individual
income tax rate brackets above 15 percent and 5 percent (zero in 2008)
for lower income taxpayers. The Administration proposes to extend
permanently these reduced rates (15 percent and zero), which are
scheduled to expire on December 31, 2008.
Extend permanently increased expensing for small business.--Small
business taxpayers are allowed to expense up to $100,000 in annual
investment expenditures for qualifying property (expanded to include
off-the-shelf computer software) placed in service in taxable years 2003
through 2007. The amount that may be expensed is reduced by the amount
by which the taxpayer's cost of qualifying property exceeds $400,000.
Both the deduction and annual investment limits are indexed annually for
inflation, effective for taxable years beginning after 2003 and before
2008. Also, with respect to a taxable year beginning after 2002 and
before 2008, taxpayers are permitted to make or revoke expensing
elections on amended returns without the consent of the IRS
Commissioner. The Administration proposes to extend permanently each of
these temporary provisions, applicable for qualifying property
(including off-the-shelf computer software) placed in service in taxable
years beginning after 2007.
Extend permanently provisions expiring in 2010.--Most of the
provisions of the 2001 tax cut sunset on December 31, 2010. The
Administration proposes to extend those provisions permanently.
TAX INCENTIVES
Simplify and Encourage Saving
Expand tax-free savings opportunities.--Under current law, individuals
can contribute to traditional Individual Retirement Accounts (IRAs),
nondeductible IRAs, and Roth IRAs, each subject to different sets of
rules. For example, contributions to traditional IRAs are deductible,
while distributions are taxed; contributions to Roth IRAs are taxed, but
distributions are excluded from income. In addition, eligibility to
contribute
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is subject to various age and income limits. While primarily intended
for retirement saving, withdrawals for certain education, medical, and
other non-retirement expenses are penalty free. The eligibility and
withdrawal restrictions for these accounts complicate compliance and
limit incentives to save.
The Administration proposes to replace current law IRAs with two new
savings accounts: a Lifetime Savings Account (LSA) and a Retirement
Savings Account (RSA). Regardless of age or income, individuals could
make annual nondeductible contributions of $5,000 to an LSA and $5,000
(or earnings if less) to an RSA. Distributions from an LSA would be
excluded from income and could be made at anytime for any purpose
without restriction. Distributions from an RSA would be excluded from
income after attaining age 58 or in the event of death or disability.
All other distributions would be included in income (to the extent they
exceed basis) and subject to an additional tax. Distributions would be
deemed to come from basis first. The proposal would be effective for
contributions made after December 31, 2005 and future year contribution
limits would be indexed for inflation.
Existing Roth IRAs would be renamed RSAs and would be subject to the
new rules for RSAs. Existing traditional and nondeductible IRAs could be
converted into an RSA by including the conversion amount (excluding
basis) in gross income, similar to a current-law Roth conversion.
However, no income limit would apply to the ability to convert.
Taxpayers who convert IRAs to RSAs could spread the included conversion
amount over several years. Existing traditional or nondeductible IRAs
that are not converted to RSAs could not accept new contributions. New
traditional IRAs could be created to accommodate rollovers from employer
plans, but they could not accept new individual contributions.
Individuals wishing to roll an amount directly from an employer plan to
an RSA could do so by including the rollover amount (excluding basis) in
gross income (i.e., ``converting'' the rollover, similar to a current
law Roth conversion).
Saving will be further simplified and encouraged by administrative
changes already planned for the 2007 filing season that will allow
taxpayers to have their tax refunds directly deposited into more than
one account. Consequently, taxpayers will be able, for example, to
direct that a portion of their tax refunds be deposited into an LSA or
RSA.
Consolidate employer-based savings accounts.--Current law provides
multiple types of tax-preferred employer-based savings accounts to
encourage saving for retirement. The accounts have similar goals but are
subject to different sets of rules regulating eligibility, contribution
limits, tax treatment, and withdrawal restrictions. For example, 401(k)
plans for private employers, SIMPLE 401(k) plans for small employers,
403(b) plans for 501(c)(3) organizations and public schools, and 457
plans for State and local governments are all subject to different
rules. To qualify for tax benefits, plans must satisfy multiple
requirements. Among the requirements, the plan generally may not
discriminate in favor of highly compensated employees with regard either
to coverage or to amount or availability of contributions or benefits.
Rules covering employer-based savings accounts are among the lengthiest
and most complicated sections of the tax code and associated
regulations. This complexity imposes substantial costs on employers,
participants, and the government, and likely has inhibited the adoption
of retirement plans by employers, especially small employers.
The Administration proposes to consolidate 401(k), SIMPLE 401(k),
403(b), and 457 plans, as well as SIMPLE IRAs and SARSEPs, into a single
type of plan--Employee Retirement Savings Accounts (ERSAs)--that would
be available to all employers. ERSA non-discrimination rules would be
simpler and include a new ERSA non-discrimination safe-harbor. Under one
of the safe-harbor options, a plan would satisfy the nondiscrimination
rules with respect to employee deferrals and employee contributions if
it provided a 50-percent match on elective contributions up to six
percent of compensation. By creating a simplified and uniform set of
rules, the proposal would substantially reduce complexity. The proposal
would be effective for taxable years beginning after December 31, 2005.
Establish Individual Development Accounts (IDAs).--The Administration
proposes to allow eligible individuals to make contributions to a new
savings vehicle, the Individual Development Account, which would be set
up and administered by qualified financial institutions, nonprofit
organizations, or Indian tribes (qualified entities). Citizens or legal
residents of the United States between the ages of 18 and 60 who cannot
be claimed as a dependent on another taxpayer's return, are not
students, and who meet certain income limitations would be eligible to
establish and contribute to an IDA. A single taxpayer would be eligible
to establish and contribute to an IDA if his or her modified AGI in the
preceding taxable year did not exceed $20,000 ($30,000 for heads of
household, and $40,000 for married taxpayers filing a joint return).
These thresholds would be indexed annually for inflation beginning in
2008. Qualified entities that set up and administer IDAs would be
required to match, dollar-for-dollar, the first $500 contributed by an
eligible individual to an IDA in a taxable year. Qualified entities
would be allowed a 100 percent tax credit for up to $500 in annual
matching contributions to each IDA, and a $50 tax credit for each IDA
maintained at the end of a taxable year with a balance of not less that
$100 (excluding the taxable year in which the account was established).
Matching contributions and the earnings on those contributions would be
deposited in a separate ``parallel account.'' Contributions to an IDA by
an eligible individual would not be deductible, and earnings on those
contributions would be included in income. Matching contributions by
qualified entities and the earnings on those contributions would be tax-
free.
Withdrawals from the parallel account may be made only for qualified
purposes (higher education, the first-
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time purchase of a home, business start-up, and qualified rollovers).
Withdrawals from the IDA for other than qualified purposes may result in
the forfeiture of some or all matching contributions and the earnings on
those contributions. The proposal would be effective for contributions
made after December 31, 2006 and before January 1, 2014, to the first
900,000 IDA accounts opened before January 1, 2012.
Invest in Health Care
Provide a refundable tax credit for the purchase of health
insurance.--Current law provides a tax preference for employer-provided
group health insurance plans, but not for individually purchased health
insurance coverage except to the extent that deductible medical expenses
exceed 7.5 percent of adjusted gross income (AGI), the individual has
self-employment income, or the individual is eligible under the Trade
Act of 2002 to purchase certain types of qualified health insurance. In
addition, individuals are allowed to accumulate funds in a health
savings account (HSA) or medical savings account (MSA) on a tax-
preferred basis to pay for medical expenses, provided they are covered
by an HSA high-deductible health plan (and no other health plan). The
Administration proposes to make health insurance more affordable for
individuals not covered by an employer plan or a public program.
Effective for taxable years beginning after December 31, 2005, a new
refundable tax credit would be provided for the cost of health insurance
purchased by individuals under age 65. The credit would provide a
subsidy for a percentage of the health insurance premium, up to a
maximum includable premium. The maximum subsidy percentage would be 90
percent for low-income taxpayers and would phase down with income. The
maximum credit would be $1,000 for an adult and $500 for a child. The
credit would be phased out at $30,000 for single taxpayers and $60,000
for families purchasing a family policy.
If the health insurance qualifies as an HSA high-deductible health
plan, an individual may opt to contribute 30 percent of the credit to a
special HSA that could only be used to pay for medical expenses.
Individuals could claim the tax credit for health insurance premiums
paid as part of the normal tax-filing process. Alternatively, beginning
July 1, 2007, the tax credit would be available in advance at the time
the individual purchases health insurance. The advance credit would
reduce the premium paid by the individual to the health insurer, and the
health insurer would be reimbursed directly by the Department of
Treasury for the amount of the advance credit. Eligibility for an
advance credit would be based on an individual's prior year tax return.
To qualify for the credit, a health insurance policy would have to
include coverage for catastrophic medical expenses. Qualifying insurance
could be purchased in the individual market. Qualifying health insurance
could also be purchased through private purchasing groups, State-
sponsored insurance purchasing pools, and high-risk pools. Such groups
may make purchasing health insurance easier and help reduce health
insurance costs and increase coverage options for individuals, including
older and higher-risk individuals.
Provide an above-the-line deduction for high-deductible insurance
premiums.--Current law provides a tax preference for employer-provided
group health insurance plans, but not for individually purchased health
insurance coverage except to the extent that deductible medical expenses
exceed 7.5 percent of AGI, the individual has self-employment income, or
the individual is eligible under the Trade Act of 2002 to purchase
certain types of qualified health insurance. Current law also allows
individuals to accumulate funds in an HSA or MSA on a tax-preferred
basis to pay for medical expenses, provided they are covered by a high-
deductible health plan (and no other health plan). The Administration
proposes to allow individuals who contribute to an HSA because they are
covered under an HSA high-deductible health plan in the individual
insurance market to deduct the amount of the premium in determining AGI
(whether or not the person itemizes deductions). Individuals claiming
other credits or deductions or covered by employer plans, public plans
or otherwise not eligible to contribute to an HSA would not qualify. The
provision would be effective to taxable years beginning after December
31, 2005.
Provide a refundable tax credit for contributions of small employers
to employee HSAs.--Under current law, employers are provided a deduction
for the cost of health coverage provided to employees and the value of
that coverage is not subject to tax for the employees. Nevertheless,
many American workers in small firms are currently without health
coverage. In order to provide an incentive to small employers to sponsor
group health coverage, especially high-deductible health coverage that
encourages cost consciousness, the Administration proposes to provide a
refundable tax credit for employer contributions to employee HSA
accounts of up to $200 for single coverage and up to $500 for family
coverage. The subsidy would be provided to for-profit employers that
normally employ fewer than 100 employees. The employer would be required
to maintain a high-deductible health plan (as defined for purposes of
the HSA) accessible to all employees, but the employer would not be
required to make contributions toward employees' premiums under the
plan. The employer would not be entitled to a deduction for the amount
reimbursed by the credit and the credit could not be carried back or
carried forward. The amount of the employer contribution to the HSA for
which a credit is claimed would be maintained in a special HSA that
would be subject to the rules currently applicable to HSAs, except that
withdrawals in excess of qualified medical expenses would subject the
HSA owner to a tax equal to 100 percent of the amount of the withdrawal.
Sole proprietors, partners and S-corporation shareholders would be
eligible for the credit to the extent their business is a small employer
or
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has no employees. However, self-employed individuals would not be
entitled to any deductions for the amount reimbursed by the credit. The
HSA tax credit would be effective for taxable years beginning after
December 31, 2005.
Improve the Health Coverage Tax Credit.--The Health Coverage Tax
Credit (HCTC) was created under the Trade Act of 2002 for the purchase
of qualified health insurance. Eligible persons include certain
individuals who are receiving benefits under the TAA or the Alternative
TAA (ATAA) program and certain individuals between the ages of 55 and 64
who are receiving pension benefits from the Pension Benefit Guaranty
Corporation (PBGC). The tax credit is refundable and can be claimed
through an advance payment mechanism at the time the insurance is
purchased. To make the requirements for qualified State-based coverage
under the HCTC more consistent with the rules applicable under the
Health Insurance Portability and Accountability Act (HIPAA) and thus
encourage more plans to participate in the HCTC program, the
Administration proposes to allow State-based coverage to impose a pre-
existing condition restriction for a period of up to 12 months, provided
the plan reduces the restriction period by the length of the eligible
individual's creditable coverage (as of the date the individual applied
for the State-based coverage). This provision would be effective for
eligible individuals applying for coverage after December 31, 2005.
Also, in order to prevent an individual from losing the benefit of the
HCTC just because his or her spouse becomes eligible for Medicare, the
Administration proposes to permit spouses of HCTC-eligible individuals
to claim the HCTC when the HCTC-eligible individual becomes entitled to
Medicare coverage. The spouse, however, would have to be at least 55
years old and meet the other HCTC eligibility requirements. This
provision would be effective for taxable years beginning after December
31, 2005. Finally, to improve the administration of the HCTC, the
Administration proposes to: (1) modify the definition of ``other
specified coverage'' for ``eligible ATAA recipients,'' to be the same as
the definition applied to ``eligible TAA recipients;'' (2) clarify that
certain PBGC pension recipients are eligible for the tax credit; (3)
allow State-based continuation coverage to qualify without meeting the
requirements for State-based qualified coverage; (4) for purposes of the
State-based coverage rules, permit the Commonwealths of Puerto Rico and
Northern Mariana Islands, as well as American Samoa, Guam, and the U.S.
Virgin Islands to be deemed as States; and (5) clarify the application
of the confidentiality and disclosure rules to the administration of the
advance credit.
Allow the orphan drug tax credit for certain pre-designation
expenses.--Current law provides a 50-percent credit for expenses related
to human clinical testing of drugs for the treatment of certain rare
diseases and conditions (``orphan drugs''). A taxpayer may claim the
credit only for expenses incurred after the Food and Drug Administration
(FDA) designates a drug as a potential treatment for a rare disease or
condition. This creates an incentive to defer clinical testing for
orphan drugs until the taxpayer receives the FDA's approval and
increases complexity for taxpayers by treating pre-designation and post-
designation clinical expenses differently. The Administration proposes
to allow taxpayers to claim the orphan drug credit for expenses incurred
prior to FDA designation if designation occurs before the due date
(including extensions) for filing the tax return for the year in which
the FDA application was filed. The proposal would be effective for
qualified expenses incurred after December 31, 2004.
Provide Incentives for Charitable Giving
Permit tax-free withdrawals from IRAs for charitable contributions.--
Under current law, eligible individuals may make deductible or non-
deductible contributions to a traditional IRA. Pre-tax contributions and
earnings in a traditional IRA are included in income when withdrawn.
Effective for distributions after date of enactment, the Administration
proposes to allow individuals who have attained age 65 to exclude from
gross income IRA distributions made directly to a charitable
organization. The exclusion would apply without regard to the
percentage-of-AGI limitations that apply to deductible charitable
contributions. The exclusion would apply only to the extent the
individual receives no return benefit in exchange for the transfer, and
no charitable deduction would be allowed with respect to any amount that
is excludable from income under this provision.
Expand and increase the enhanced charitable deduction for
contributions of food inventory.--A taxpayer's deduction for charitable
contributions of inventory generally is limited to the taxpayer's basis
(typically cost) in the inventory. However, for certain contributions of
inventory, C corporations may claim an enhanced deduction equal to the
lesser of: (1) basis plus one half of the fair market value in excess of
basis, or (2) two times basis. To be eligible for the enhanced
deduction, the contributed property generally must be inventory of the
taxpayer contributed to a charitable organization and the donee must (1)
use the property consistent with the donee's exempt purpose solely for
the care of the ill, the needy, or infants, (2) not transfer the
property in exchange for money, other property, or services, and (3)
provide the taxpayer a written statement that the donee's use of the
property will be consistent with such requirements. To use the enhanced
deduction, the taxpayer must establish that the fair market value of the
donated item exceeds basis.
Under the Administration's proposal, which is designed to encourage
contributions of food inventory to charitable organizations, any
taxpayer engaged in a trade or business would be eligible to claim an
enhanced deduction for donations of food inventory. The enhanced
deduction for donations of food inventory
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would be increased to the lesser of: (1) fair market value or (2) two
times basis. However, to ensure consistent treatment of all businesses
claiming an enhanced deduction for donations of food inventory, the
enhanced deduction for qualified food donations by S corporations and
non-corporate taxpayers would be limited to 10 percent of net income
from the trade or business. A special provision would allow taxpayers
with a zero or low basis in the qualified food donation (e.g., taxpayers
that use the cash method of accounting for purchases and sales, and
taxpayers that are not required to capitalize indirect costs) to assume
a basis equal to 25 percent of fair market value. The enhanced deduction
would be available only for donations of ``apparently wholesome food''
(food intended for human consumption that meets all quality and labeling
standards imposed by Federal, state, and local laws and regulations,
even though the food may not be readily marketable due to appearance,
age, freshness, grade, size, surplus, or other conditions). The fair
market value of ``apparently wholesome food'' that cannot or will not be
sold solely due to internal standards of the taxpayer or lack of market,
would be determined by taking into account the price at which the same
or substantially the same food items (as to both type and quality) are
sold by the taxpayer at the time of the contribution or, if not sold at
such time, in the recent past. These proposed changes in the enhanced
deduction for donations of food inventory would be effective for taxable
years beginning after December 31, 2004.
Reform excise tax based on investment income of private
foundations.--Under current law, private foundations that are exempt
from Federal income tax are subject to a two-percent excise tax on their
net investment income (one-percent if certain requirements are met). The
excise tax on private foundations that are not exempt from Federal
income tax, such as certain charitable trusts, is equal to the excess of
the sum of the excise tax that would have been imposed if the foundation
were tax exempt and the amount of the unrelated business income tax that
would have been imposed if the foundation were tax exempt, over the
income tax imposed on the foundation. To encourage increased charitable
activity and simplify the tax laws, the Administration proposes to
replace the two rates of tax on the net investment income of private
foundations that are exempt from Federal income tax with a single tax
rate of one percent. The excise tax on private foundations not exempt
from Federal income tax would be equal to the excess of the sum of the
one-percent excise tax that would have been imposed if the foundation
were tax exempt and the amount of the unrelated business income tax what
would have been imposed if the foundation were tax exempt, over the
income tax imposed on the foundation. The proposed change would be
effective for taxable years beginning after December 31, 2004.
Modify tax on unrelated business taxable income of charitable
remainder trusts.--A charitable remainder annuity trust is a trust that
is required to pay, at least annually, a fixed dollar amount of at least
five percent of the initial value of the trust to a noncharity for the
life of an individual or for a period of 20 years or less, with the
remainder passing to charity. A charitable remainder unitrust is a trust
that generally is required to pay, at least annually, a fixed percentage
of at least five percent of the fair market value of the trust's assets
determined at least annually to a non-charity for the life of an
individual or for a period of 20 years or less, with the remainder
passing to charity. A trust does not qualify as a charitable remainder
annuity trust if the annuity for a year is greater than 50 percent of
the initial fair market value of the trust's assets. A trust does not
qualify as a charitable remainder unitrust if the percentage of assets
that are required to be distributed at least annually is greater than 50
percent. A trust does not qualify as a charitable remainder annuity
trust or a charitable remainder unitrust unless the value of the
remainder interest in the trust is at least 10 percent of the value of
the assets contributed to the trust. Distributions from a charitable
remainder annuity trust or charitable remainder unitrust, which are
included in the income of the beneficiary for the year that the amount
is required to be distributed, are treated in the following order as:
(1) ordinary income to the extent of the trust's undistributed ordinary
income for that year and all prior years; (2) capital gains to the
extent of the trust's undistributed capital gain for that year and all
prior years; (3) other income to the extent of the trust's undistributed
other income for that year and all prior years; and (4) corpus (trust
principal).
Charitable remainder annuity trusts and charitable remainder unitrusts
are exempt from Federal income tax; however, such trusts lose their
income tax exemption for any year in which they have unrelated business
taxable income. Any taxes imposed on the trust are required to be
allocated to trust corpus. The Administration proposes to levy a 100-
percent excise tax on the unrelated business taxable income of
charitable remainder trusts, in lieu of removing the Federal income tax
exemption for any year in which unrelated business taxable income is
incurred. This change, which is a more appropriate remedy than loss of
tax exemption, is proposed to become effective for taxable years
beginning after December 31, 2004, regardless of when the trust was
created.
Modify basis adjustment to stock of S corporations contributing
appreciated property.--Under current law, each shareholder in an S
corporation separately accounts for his or her pro rata share of the S
corporation's charitable contributions in determining his or her income
tax liability. A shareholder's basis in the stock of the S corporation
must be reduced by the amount of his or her pro rata share of the S
corporation's charitable contribution. In order to preserve the benefit
of providing a charitable contribution deduction for contributions of
appreciated property and to prevent the recognition of gain on the
contributed prop
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erty on the disposition of the S corporation stock, the Administration
proposes to allow a shareholder in an S corporation to increase his or
her basis in the stock of an S corporation by an amount equal to the
excess of the shareholder's pro rata share of the S corporation's
charitable contribution over the stockholder's pro rata share of the
adjusted basis of the contributed property. The proposal would be
effective for taxable years beginning after December 31, 2004.
Repeal the $150 million limitation on qualified 501(c)(3) bonds.--
Current law contains a $150 million limitation on the volume of
outstanding, non-hospital, tax-exempt bonds for the benefit of any one
501(c)(3) organization. The limitation was repealed in 1997 for bonds
issued after August 5, 1997, at least 95 percent of the net proceeds of
which are used to finance capital expenditures incurred after that date.
However, the limitation continues to apply to bonds more than five
percent of the net proceeds of which finance or refinance working
capital expenditures, or capital expenditures incurred on or before
August 5, 1997. In order to simplify the tax laws and provide consistent
treatment of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the $150 million limitation in its entirety.
Repeal certain restrictions on the use of qualified 501(c)(3) bonds
for residential rental property.--Tax-exempt, 501(c)(3) organizations
generally may utilize tax-exempt financing for charitable purposes.
However, existing law contains a special limitation under which
501(c)(3) organizations may not use tax-exempt financing to acquire
existing residential rental property for charitable purposes unless the
property is rented to low-income tenants or is substantially
rehabilitated. In order to simplify the tax laws and provide consistent
treatment of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the residential rental property limitation.
Strengthen Education
Extend, increase, and expand the above-the-line deduction for
qualified out-of-pocket classroom expenses.--Under current law, teachers
who itemize deductions (do not use the standard deduction) and incur
unreimbursed, job-related expenses are allowed to deduct those expenses
to the extent that when combined with other miscellaneous itemized
deductions they exceeded two percent of AGI. Current law also allows
certain teachers and other elementary and secondary school professionals
to treat up to $250 in annual qualified out-of-pocket classroom expenses
as a non-itemized deduction (above-the-line deduction). This additional
deduction is effective for expenses incurred in taxable years beginning
after December 31, 2001 and before January 1, 2006. Unreimbursed
expenditures for certain books, supplies, and equipment related to
classroom instruction qualify for the above-the-line deduction. Expenses
claimed as an above-the-line deduction may not be claimed as an itemized
deduction. The Administration proposes to extend the above-the-line
deduction to apply to qualified out-of-pocket expenditures incurred in
taxable years beginning after December 31, 2005, to increase the
deduction to $400, and to expand the deduction to apply to unreimbursed
expenditures for certain professional training programs.
Encourage Telecommuting
Exclude from income the value of employer-provided computers,
software, and peripherals.--Under current law, the value of computers
and related equipment and services provided by an employer to an
employee for home use is generally allocated between business and
personal use. The business-use portion is excluded from the employee's
income whereas the personal-use portion is subject to income and payroll
taxes. In order to simplify recordkeeping, improve compliance, and
encourage telecommuting, the Administration proposes to allow
individuals to exclude from income the value of employer-provided
computers and related equipment and services necessary to perform work
for the employer at home. The employee would be required to make
substantial use of the equipment to perform work for the employer.
Substantial business use would include standby use for periods when work
from home may be required by the employer, such as during work closures
caused by the threat of terrorism, inclement weather, or natural
disasters. The proposal would be effective for taxable years beginning
after December 31, 2005.
Provide Assistance to Distressed Areas
Establish Opportunity Zones.--The Administration proposes to establish
authority to designate 40 opportunity zones (28 in urban areas and 12 in
rural areas). The zone designation and corresponding incentives would be
in effect from January 1, 2006 through December 31, 2015. To qualify to
apply for zone status, a community must either have suffered from a
significant decline in its economic base over the past decade as
measured by the loss of manufacturing and retail establishments and
manufacturing jobs, or be an existing empowerment zone, renewal
community or enterprise community. The Secretary of Commerce would
select opportunity zones through a competitive process based on the
applicant's ``community transition plan'' and ``statement of economic
transition.'' The community transition plan would have to set concrete,
measurable goals for reducing local regulatory and tax barriers to
construction, residential development and business creation. The
statement of economic transition would have to demonstrate that the
local community's economic base is in transition, as indicated by a
declining job base and labor force, and other measures, during the past
decade. In evaluating applications, the Secretary of Commerce could
consider other factors, including: (1) changes in unemployment rates,
poverty rates, household income, homeownership and labor force
participation; (2) the educational attainment and average
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age of the population; and (3) for urban areas, the number of mass
layoffs occurring in the area's vicinity over the previous decade.
Empowerment zones and renewal communities designated as opportunity
zones would not count against the limitation of 40 new opportunity
zones. Such communities would be required to relinquish their current
status and benefits once selected. Opportunity zone benefits for
converted empowerment zones and renewal communities would expire on
December 31, 2009. Tax benefits for enterprise communities expired at
the end of 2004. Enterprise communities designated as opportunity zones
would count against the limitation of 40 new zones and opportunity zone
benefits would be in effect through 2015.
A number of tax incentives would be applicable to opportunity zones.
First, a business would be allowed to exclude 25 percent of its taxable
income if it qualified as an ``opportunity zone business'' and it
satisfied a $5 million gross receipts test. The definition of an
opportunity zone business would be based on the definition of a
``qualified active low-income community business'' for purposes of the
new markets tax credit, treating opportunity zones as low-income
communities. Second, an opportunity zone business would be allowed to
expense the cost of section 179 property that is qualified zone
property, up to an additional $100,000 above the amounts generally
available under current law. Third, a commercial revitalization
deduction would be available for opportunity zones in a manner similar
to the deduction for renewal communities. A $12 million annual cap on
these deductions would apply to each opportunity zone. Finally,
individuals who live and work in an opportunity zone would constitute a
new target group with respect to wages earned within the zone under the
proposed combined work opportunity tax credit and welfare-to-work tax
credit (see discussion later in this Chapter).
Provide Disaster Relief
Provide tax relief for Federal Emergency Management Agency (FEMA)
hazard mitigation assistance programs.--The Federal Emergency Management
Agency's mitigation assistance programs provide grants through State and
local governments to businesses and individuals for cost-effective
responses to natural hazards. FEMA may make grants in the aftermath of a
major disaster, in anticipation of a natural hazard, or in areas of
severe repetitive loss. Grants may fund demolition, retro-fitting,
elevation, or other measures to reduce the cost of future property
damage. Under current tax law, gross income includes governmental
disaster payments unless they fall into certain exceptions that
generally provide for relief with respect to damages or expenses
incurred, but would not encompass payments to mitigate future damage.
Tax relief is warranted to the extent that property owners may decline
to participate in mitigation assistance programs because of the
potential tax obligation. The Administration proposes to exclude FEMA
mitigation grants from gross income. To prevent a double benefit, a
business that receives a tax-free mitigation grant and uses the grant to
purchase or repair property could not claim a deduction for those
expenses. The exclusion would apply only to FEMA mitigation grants, and
not to any compensation from a mitigation assistance program for the
acquisition of property situated in a disaster or hazard area. However,
if FEMA acquires property, and the owner replaces the property within a
specified period, then instead of reflecting the compensation in gross
income, the owner would have a carry-over cost basis in the replacement
property. If a mitigation assistance program pays the cost of improving
property, the cost would be excluded from gross income, but there would
be no increase in the owner's cost basis in the property. Thus, if the
property is later sold, any resulting gain potentially would be taxable.
The proposal generally would be effective for mitigation assistance
received after December 31, 2004, but the Department of Treasury would
have administrative authority to provide retroactive relief.
Increase Housing Opportunities
Provide tax credit for developers of affordable single-family
housing.--The Administration proposes to provide annual tax credit
authority to states (including U.S. possessions) designed to promote the
development of affordable single-family housing in low-income urban and
rural neighborhoods. Beginning in calendar year 2006, first-year credit
authority equal to the amount provided for low-income rental housing tax
credits would be made available to each state. That amount was equal to
the greater of $2.075 million or $1.80 per capita for 2004, and is
indexed annually for inflation. State housing agencies would award
first-year credits to single-family housing units comprising a project
located in a census tract with median income equal to 80 percent or less
of area median income. Units in condominiums and cooperatives could
qualify as single-family housing. Credits would be awarded as a fixed
amount for individual units comprising a project. The present value of
the credits, determined on the date of a qualifying sale, could not
exceed 50 percent of the cost of constructing a new home or
rehabilitating an existing property. The taxpayer (developer or investor
partnership) owning the housing unit immediately prior to the sale to a
qualified buyer would be eligible to claim credits over a five-year
period beginning on the date of sale. Eligible homebuyers would be
required to have incomes equal to 80 percent or less of area median
income. Certain technical features of the provision would follow similar
features of current law with respect to the low-income housing tax
credit and mortgage revenue bonds.
Protect the Environment
Extend permanently expensing of brownfields remediation costs.--
Taxpayers may elect, with respect to expenditures paid or incurred
before January 1, 2006, to treat certain environmental remediation
expenditures that would otherwise be chargeable to a cap
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ital account as deductible in the year paid or incurred. The
Administration proposes to extend this provision permanently making it
available for expenditures paid or incurred after December 31, 2005, and
facilitating its use by businesses to undertake projects that may be
uncertain in overall duration.
Exclude 50 percent of gains from the sale of property for conservation
purposes.--The Administration proposes to create a new incentive for
private, voluntary land protection. This incentive is a cost-effective,
non-regulatory approach to conservation. Under the proposal, when land
(or an interest in land or water) is sold for conservation purposes,
only 50 percent of any gain would be included in the seller's income.
This proposal applies to conservation easements and similar sales of
partial interests in land, such as development rights and agricultural
conservation easements, for conservation purposes. To be eligible for
the exclusion, the sale may be either to a government agency or to a
qualified conservation organization, and the buyer must supply a letter
of intent that the acquisition will serve conservation purposes. In
addition, the taxpayer or a member of the taxpayer's family must have
owned the property for the three years immediately preceding the sale.
Antiabuse provisions will ensure that the conservation purposes continue
to be served. The provision would be effective for sales taking place
after December 31, 2005 and before January 1, 2009.
Increase Energy Production and Promote Energy Conservation
Extend the tax credit for producing electricity from wind, biomass,
and landfill gas and modify the tax credit for electricity produced from
biomass.--Taxpayers are allowed a tax credit for electricity produced
from wind, biomass, landfill gas, and certain other sources. Biomass
includes closed-loop biomass (organic material from a plant grown
exclusively for use at a qualifying facility to produce electricity) and
open-loop biomass (biomass from agricultural livestock waste nutrients
or cellulosic waste material derived from forest-related resources,
agricultural sources, and other specified sources). Open-loop biomass
does not include biomass that is co-fired with coal. Thus, electricity
produced from biomass, other than closed-loop biomass, co-fired with
coal does not qualify for the credit. The credit rate is 1.5 cents per
kilowatt hour for electricity produced from wind and closed-loop biomass
and 0.75 cent per kilowatt hour for electricity produced from open-loop
biomass and landfill gas (both rates are adjusted for inflation since
1992). To qualify for the credit, the electricity must be produced at a
facility placed in service before January 1, 2006. The Administration
proposes to extend the credit for electricity produced from wind,
biomass other than agricultural livestock waste nutrients, and landfill
gas to electricity produced at facilities placed in service before
January 1, 2008. In addition, a credit at 60 percent of the generally
applicable rate for electricity produced from open-loop biomass would be
allowed for electricity produced from open-loop biomass (other than
agricultural livestock waste nutrients) co-fired in coal plants during
the period from January 1, 2006 through December 31, 2008.
Provide tax credit for residential solar energy systems.--Current law
provides a 10-percent investment tax credit to businesses for qualifying
equipment that uses solar energy to generate electricity; to heat, cool
or provide hot water for use in a structure; or to provide solar process
heat. A credit currently is not provided for nonbusiness purchases of
solar energy equipment. The Administration proposes a new tax credit for
individuals who purchase solar energy equipment to generate electricity
(photovoltaic equipment) or heat water (solar water heating equipment)
for use in a dwelling unit that the individual uses as a residence,
provided the equipment is used exclusively for purposes other than
heating swimming pools. The proposed nonrefundable credit would be equal
to 15 percent of the cost of the equipment and its installation; each
individual taxpayer would be allowed a maximum credit of $2,000 for
photovoltaic equipment and $2,000 for solar water heating equipment. The
credit would apply to photovoltaic equipment placed in service after
December 31, 2004 and before January 1, 2010 and to solar water heating
equipment placed in service after December 31, 2004 and before January
1, 2008.
Modify treatment of nuclear decommissioning funds.--Under current law,
deductible contributions to nuclear decommissioning funds are limited to
the amount included in the taxpayer's cost of service for ratemaking
purposes. For deregulated utilities, this limitation may result in the
denial of any deduction for contributions to a nuclear decommissioning
fund. The Administration proposes to repeal this limitation.
Also under current law, deductible contributions are not permitted to
exceed the amount the IRS determines to be necessary to provide for
level funding of an amount equal to the taxpayer's post-1983
decommissioning costs. The Administration proposes to permit funding of
all decommissioning costs through deductible contributions. Any portion
of these additional contributions relating to pre-1984 costs that
exceeds the amount previously deducted (other than under the nuclear
decommissioning fund rules) or excluded from the taxpayer's gross income
on account of the taxpayer's liability for decommissioning costs, would
be allowed as a deduction ratably over the remaining useful life of the
nuclear power plant.
The Administration's proposal would also permit taxpayers to make
deductible contributions to a qualified fund after the end of the
nuclear power plant's estimated useful life and would provide that
nuclear decommissioning costs are deductible when paid. These changes in
the treatment of nuclear decommissioning funds are proposed to be
effective for taxable years beginning after December 31, 2004.
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Provide tax credit for purchase of certain hybrid and fuel cell
vehicles.--Under current law, a 10-percent tax credit up to a maximum of
$4,000 is provided for the cost of a qualified electric vehicle. The
full amount of the credit is available for purchases prior to January 1,
2006. The credit is reduced by 75 percent for purchases in 2006 and is
not available for purchases after December 31, 2006. A qualified
electric vehicle is a motor vehicle that is powered primarily by an
electric motor drawing current from rechargeable batteries, fuel cells,
or other portable sources of electric current, the original use of which
commences with the taxpayer, and that is acquired for use by the
taxpayer and not for resale. Electric vehicles and hybrid vehicles
(those that have more than one source of power on board the vehicle)
have the potential to reduce petroleum consumption, air pollution and
greenhouse gas emissions. To encourage the purchase of such vehicles,
the Administration is proposing the following tax credits: (1) A credit
of up to $4,000 would be provided for the purchase of qualified hybrid
vehicles after December 31, 2004 and before January 1, 2009. The amount
of the credit would depend on the percentage of maximum available power
provided by the rechargeable energy storage system and the amount by
which the vehicle's fuel economy exceeds the 2000 model year city fuel
economy. (2) A credit of up to $8,000 would be provided for the purchase
of new qualified fuel cell vehicles after December 31, 2004 and before
January 1, 2013. A minimum credit of $4,000 would be provided, which
would increase as the vehicle's fuel efficiency exceeded the 2000 model
year city fuel economy, reaching a maximum credit of $8,000 if the
vehicle achieved at least 300 percent of the 2000 model year city fuel
economy.
Provide tax credit for combined heat and power property.--Combined
heat and power (CHP) systems are used to produce electricity (and/or
mechanical power) and usable thermal energy from a single primary energy
source. Depreciation allowances for CHP property vary by asset use and
capacity. No income tax credit is provided under current law for
investment in CHP property. CHP systems utilize thermal energy that is
otherwise wasted in producing electricity by more conventional methods
and achieve a greater level of overall energy efficiency, thereby
lessening the consumption of primary fossil fuels, lowering total energy
costs, and reducing carbon emissions. To encourage increased energy
efficiency by accelerating planned investments and inducing additional
investments in such systems, the Administration is proposing a 10-
percent investment credit for qualified CHP systems with an electrical
capacity in excess of 50 kilowatts or with a capacity to produce
mechanical power in excess of 67 horsepower (or an equivalent
combination of electrical and mechanical energy capacities). A qualified
CHP system would be required to produce at least 20 percent of its total
useful energy in the form of thermal energy and at least 20 percent of
its total useful energy in the form of electrical or mechanical power
(or a combination thereof) and would also be required to satisfy an
energy-efficiency standard. For CHP systems with an electrical capacity
in excess of 50 megawatts (or a mechanical energy capacity in excess of
67,000 horsepower), the total energy efficiency would have to exceed 70
percent. For smaller systems, the total energy efficiency would have to
exceed 60 percent. Investments in qualified CHP assets that are
otherwise assigned cost recovery periods of less than 15 years would be
eligible for the credit, provided that the taxpayer elects to treat such
property as having a 22-year class life (and thus depreciates the
property using a 15-year recovery period). The credit, which would be
treated as an energy credit under the investment credit component of the
general business credit, and could not be used in conjunction with any
other credit for the same equipment, would apply to investments in CHP
property placed in service after December 31, 2004 and before January 1,
2010.
Restructure Assistance to New York City
Provide tax incentives for transportation infrastructure.--The
Administration proposes to restructure the tax benefits for New York
recovery that were enacted in 2002. Some of the tax benefits that were
provided to New York following the attacks of September 11, 2001, likely
will not be usable in the form in which they were originally provided.
As such, the Administration proposed in the Mid-Session Review of the
2005 Budget to sunset certain existing New York Liberty Zone tax
benefits and in their place provide tax credits to New York State and
New York City for expenditures incurred in building or improving
transportation infrastructure in or connecting with the New York Liberty
Zone. The tax credit would be available as of the date of enactment,
subject to an annual limit of $200 million ($2 billion in total over 10
years), evenly divided between the State and the City. Any unused credit
limit in a given year would be added to the $200 million allowable in
the following year, including years beyond the 10-year period of the
credit. Similarly, expenditures that could not be credited in a given
year because of the credit limit would be carried forward and used
against the next year's limitation. The credit would be allowed against
any payments (e.g., income tax withholding) made by the City and State
under any provision of the Internal Revenue Code, other than Social
Security and Medicare payroll taxes and excise taxes. The Secretary of
the Treasury may prescribe such rules as are necessary to ensure that
the expenditures are made for the intended purpose.
Repeal certain New York City Liberty Zone incentives.--The
Administration proposes to terminate the following tax incentives
provided to qualified property within the New York Liberty Zone under
the 2002 economic stimulus act: (1) the additional first-year
depreciation deduction; (2) the five-year recovery period for leasehold
improvement property; (3) increased expensing for small businesses; and
(4) the extended re
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placement period for the nonrecognition of gain on involuntarily
converted property. These terminations are proposed to be effective on
the date of enactment. Property placed in service after the date of
enactment would not be eligible for the first three incentives listed
above unless a binding written contract was in effect on the date of
enactment, in which case the property would need to be placed in service
by the original termination dates provided in the 2002 economic stimulus
act. Other related changes to the Internal Revenue Code would be made as
appropriate.
SIMPLIFY THE TAX LAWS FOR FAMILIES
Simplify adoption tax benefits.--Under current law, for taxable years
beginning before January 1, 2011, the following tax benefits are
provided to taxpayers who adopt children: (1) a nonrefundable tax credit
for qualified expenses incurred in the adoption of a child, up to a
certain limit; and (2) the exclusion from gross income of qualified
adoption expenses paid or reimbursed by an employer under an adoption
assistance program, up to a certain limit.
Taxpayers may not claim the credit for expenses that are excluded from
gross income. In 2005, the limitation on qualified adoption expenses for
both the credit and the exclusion is $10,630. Taxpayers who adopt
children with special needs may claim the full $10,630 credit or
exclusion even if adoption expenses are less than this amount. Taxpayers
may carry forward unused credit amounts for up to five years. When
modified adjusted gross income exceeds $159,450 (in 2005), both the
credit amount and the amount excluded from gross income are reduced pro-
rata over the next $40,000 of modified adjusted gross income. The
maximum credit and exclusion and the income at which the phase-out range
begins are indexed annually for inflation. For taxable years beginning
after December 31, 2010, taxpayers will be able to claim the credit only
for actual expenses for the adoption of children with special needs. For
these taxpayers the qualified expense limit will be $6,000, the credit
will be reduced pro-rata between $75,000 and $115,000 of modified
adjusted gross income, and the credit amount and phase-out range will
not be indexed annually for inflation. Taxpayers may not exclude
employer-provided adoption assistance from gross income for taxable
years beginning after December 31, 2010.
To reduce marginal tax rates and simplify computations of tax
liabilities, the Administration is proposing to eliminate the income-
related phaseout of the adoption tax credit and exclusion. The proposal
would be effective for taxable years beginning after December 31, 2005.
The phaseout of adoption tax benefits increases complexity for all
taxpayers using the adoption tax provisions, including the vast majority
who are not affected by the phaseouts; raises marginal tax rates for
taxpayers in the phase-out range; and with the higher phase-out income
levels under the 2001 tax cut, affects fewer than 10,000 taxpayers. The
broader eligibility criteria, larger qualifying expense limitations, and
the employer exclusion would apply in taxable years beginning after
December 31, 2010 as a result of the Administration's proposal to extend
the 2001 tax cut provisions permanently.
Clarify eligibility of siblings and other family members for child-
related tax benefits.--The 2004 tax relief bill created a uniform
definition of a child, allowing, in many circumstances, a taxpayer to
claim the same child for five different child-related tax benefits.
Under the new rules, a qualifying child must meet relationship,
residency, and age tests. While the new rules simplify the determination
of eligibility for many child-related tax benefits, the elimination of
certain complicated factual tests to determine if siblings and certain
other family members were eligible to claim a qualifying child may have
some unintended consequences. The new rules effectively deny the EITC to
some young taxpayers who are the sole guardians of their younger
siblings. Yet some taxpayers will be able to avoid income limitations on
child-related tax benefits by allowing other family members, who have
lower incomes, to claim the taxpayers' sons or daughters as qualifying
children. To ensure that deserving taxpayers receive child-related tax
benefits, the Administration proposes to clarify the eligibility of
siblings and other family members for these benefits. First, a taxpayer
would not be a qualifying child of another individual if the taxpayer is
older than that individual. However, an individual could be a qualifying
child of a younger sibling if the individual is permanently and totally
disabled. Second, if a parent resides with his or her child for over
half the year, the parent would be the only individual eligible to claim
the child as a qualifying child. The parent could waive the child-
related tax benefits to another member of the household who has higher
adjusted gross income and is otherwise eligible for the tax benefits.
The proposal is effective for taxable years beginning after December 31,
2004.
STRENGTHEN THE EMPLOYER-BASED PENSION SYSTEM
Ensure fair treatment of older workers in cash balance conversions and
protect defined benefit plans.--Qualified retirement plans consist of
defined benefit plans and defined contribution plans. In recent years,
many plan sponsors have adopted cash balance and other ``hybrid'' plans
that combine features of defined benefit and defined contribution plans.
A cash balance plan is a defined benefit plan that provides for annual
``pay credits'' to a participant's ``hypothetical account'' and
``interest credits'' on the balance in the hypothetical account.
Questions have been raised about whether such plans satisfy the rules
relating to age discrimination and the calculation of lump sum
distributions. The Administration proposes to (1) ensure fairness for
older workers in cash balance conversions, (2) protect the defined
benefit system by clarifying the status of cash balance plans, and (3)
remove the effec
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tive ceiling on interest credits in cash balance plans. All changes
would be effective prospectively.
Strengthen funding for single-employer pension plans.--Under current
law, defined benefit pension plans are subject to minimum funding
requirements imposed under both the Internal Revenue Code and the
Employee Retirement Income Security Act of 1974 (ERISA). In the case of
a qualified plan, the Internal Revenue Code excludes such contributions
from gross income and allows a deduction for the contributions, subject
to certain limits on the maximum deductible amount. The calculation of
the minimum funding requirements and the limits on deductible
contributions are determined under a series of complex rules and
measures of assets and liability, many of which are manipulable and none
of which entail the use of an accurate measure of the plan's assets and
its true liabilities.
The Administration proposes rationalizing the multiple sets of funding
rules applicable to single-employer defined benefit plans and replacing
them with a single set of rules that provide for: (1) funding targets
that are based on meaningful, accurate measures of liabilities that
reflect the financial health of the employer; (2) the use of market
value of assets; (3) a seven-year amortization period for funding
shortfalls; (4) the opportunity for an employer to make additional
deductible contributions in good years, even when the plan's assets are
above the funding target; and (5) meaningful consequences for employers
and plans whose funded status does not improve.
These funding rules changes and the addition of meaningful
consequences for employers and plans whose funded status does not
improve and improved disclosure to plan participants, investors and
regulators are part of an overall package of reforms that will improve
the health of defined benefit pensions and the PBGC guarantee system. As
described in Chapter 7 of Analytical Perspectives and the Department of
Labor Chapter of the Budget volume, this overall package includes reform
of the premium structure for the PBGC, revision in the application of
the PBGC guarantee rates and changes to the bankruptcy law.
Reflect market interest rates in lump sum payments.--Current law
generally requires that a lump sum paid from a pension plan be
calculated using the rate of interest on 30-year Treasury securities for
the month preceding the distribution. Because there are no 30-year
Treasury securities outstanding, the interest rate on the Treasury bond
due February 15, 2031 is used for this purpose. The Administration
proposes to require that these calculations reflect market interest
rates and lump sum calculations would be calculated using interest rates
that are drawn from a zero-coupon corporate bond yield curve. The yield
curve would be issued monthly by the Secretary of Treasury and would be
based on the interest rates (averaged over 90 business days) for high
quality corporate bonds with varying maturities. In order to avoid
disruptions, the proposal would be phased in for plan years beginning in
2007 and 2008 and would not be fully effective until the plan year
beginning in 2009.
CLOSE LOOPHOLES AND IMPROVE TAX COMPLIANCE
Combat abusive foreign tax credit transactions.--Current law allows
taxpayers a credit against U.S. taxes for foreign taxes incurred with
respect to foreign income, subject to specified limits. The
Administration proposes to provide the Department of Treasury with
additional regulatory authority to ensure that the foreign tax credit
rules cannot be used to achieve inappropriate results that are not
consistent with the underlying economics of the transactions in which
the foreign tax credits arise. The regulatory authority would allow the
Department of Treasury to prevent the inappropriate separation of
foreign taxes from the related foreign income in cases where taxes are
imposed on any person in respect of income of an entity. Regulations
could provide for the disallowance of a credit for all or a portion of
the foreign taxes or the reallocation of the foreign taxes among the
participants to the transaction.
Modify the active trade or business test.--Current law allows
corporations to avoid recognizing gain in certain spin-off and split-off
transactions provided that, among other things, the active trade or
business test is satisfied. The active trade or business test requires
that immediately after the distribution, the distributing corporation
and the corporation the stock of which is distributed (the controlled
corporation) be engaged in a trade or business that has been actively
conducted throughout the five-year period ending on the date of the
distribution. There is no statutory requirement that a certain
percentage of the distributing corporation's or controlled corporation's
assets be used in that active trade or business in order for the active
trade or business test to be satisfied. Because certain non-pro rata
distributions resemble redemptions for cash, the Administration proposes
to require that in the case of a non-pro rata distribution, in order for
a corporation to satisfy the active trade or business test, as of the
date of the distribution, at least 50 percent of its assets, by value,
must be used or held for use in a trade or business that satisfies the
active trade or business test.
Impose penalties on charities that fail to enforce conservation
easements.--Although gifts of partial interests in property generally
are not deductible as charitable contributions, current law allows a
deduction for certain restrictions granted in perpetuity on the use that
may be made of real property (such as an easement). A deduction is
allowed only if the contribution is made to a qualified organization
exclusively for conservation purposes. To qualify to receive such
qualified conservation contributions, a charity must have a commitment
to protect the conservation purposes of the
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donation and have the resources to enforce the restrictions. The
Department of Treasury is concerned that in some cases charities are
failing to monitor and enforce the conservation restrictions for which
charitable contribution deductions were claimed. The proposal would
impose significant penalties on any charity that removes or fails to
enforce such a conservation restriction, or transfers the easement
without ensuring that the conservation purposes will be protected in
perpetuity. The amount of the penalty would be determined based on the
value of the easement shown on the appraisal summary provided to the
charity by the donor. The Secretary of the Treasury would be authorized
to waive the penalty in certain circumstances. The Secretary of the
Treasury also would be authorized to require such additional reporting
as may be necessary or appropriate to ensure that the conservation
purposes are protected in perpetuity.
Eliminate the special exclusion from unrelated business taxable income
for gain or loss on the sale or exchange of certain brownfields.--In
general, an organization that is otherwise exempt from Federal income
tax is taxed on income from any trade or business regularly carried on
by the organization that is not substantially related to the
organization's exempt purposes. In addition, income derived from
property that is debt-financed generally is subject to unrelated
business income tax. The 2004 jobs creation act created a special
exclusion from unrelated business taxable income of gain or loss from
the sale or exchange of certain qualifying brownfield properties. The
exclusion applies regardless of whether the property is debt-financed.
The new provision adds considerable complexity to the Internal Revenue
Code and, because there is no limit on the amount of tax-free gain,
could exempt from tax real estate development considerably beyond mere
environmental remediation. The proposal would eliminate this special
exclusion retroactive to January 1, 2005.
Apply an excise tax to amounts received under certain life insurance
contracts.--Under current law, both death benefits and accrual of cash
value under a life insurance contract are treated favorably for Federal
income tax purposes. In many states, a charity has an insurable interest
in the life of a consenting donor. The Department of Treasury has
learned of arrangements in which private investors join with a charity
to purchase life insurance on the lives of the charity's donors. The
private investors have no relationship to the insured individuals,
however, except by reason of the arrangement. These arrangements do more
to facilitate investment by private investors in life insurance
contracts than to further a charity's exempt purposes and may
inappropriately afford benefits to private investors that would not
otherwise be available without the charity's involvement. The
Administration proposes to apply a nondeductible 25 percent excise tax
to death benefits, dividends, withdrawals, loans or surrenders under a
life insurance contract if: (1) a charity has ever had a direct or
indirect ownership interest in the contract; and (2) a person other than
a charity has ever had a direct or indirect interest in the same
contract (including an interest in an entity holding an interest in that
contract). The excise tax would not apply in enumerated situations that
present a low risk of abuse. The proposal would be effective with
respect to amounts received under life insurance contracts entered into
after February 7, 2005.
Limit related party interest deductions.--Current law (section 163(j)
of the Internal Revenue Code) denies U.S. tax deductions for certain
interest expenses paid to a related party where (1) the corporation's
debt-to-equity ratio exceeds 1.5 to 1, and (2) net interest expenses
exceed 50 percent of the corporation's adjusted taxable income (computed
by adding back net interest expense, depreciation, amortization,
depletion, and any net operating loss deduction). If these thresholds
are exceeded, no deduction is allowed for interest in excess of the 50-
percent limit that is paid to a related party or paid to an unrelated
party but guaranteed by a related party, and that is not subject to U.S.
tax. Any interest that is disallowed in a given year is carried forward
indefinitely and may be deductible in a subsequent taxable year. A
three-year carryforward for any excess limitation (the amount by which
interest expense for a given year falls short of the 50-percent limit)
is also allowed. Because of the opportunities available under current
law to reduce inappropriately U.S. tax on income earned on U.S.
operations through the use of foreign related-party debt, the
Administration proposes to tighten the interest disallowance rules of
section 163(j) as follows: (1) The current law 1.5 to 1 debt-to-equity
safe harbor would be eliminated; (2) the adjusted taxable income
threshold for the limitation would be reduced from 50 percent to 25
percent of adjusted taxable income with respect to disqualified interest
other than interest paid to unrelated parties on debt that is subject to
a related-party guarantee, which generally would remain subject to the
current law 50 percent threshold; and (3) the indefinite carryforward
for disallowed interest would be limited to ten years and the three-year
carryforward of excess limitation would be eliminated. The Department of
Treasury also is conducting a study of these rules and the potential for
further modifications to ensure the prevention of inappropriate income-
reduction opportunities.
Clarify and simplify qualified tuition programs.--Current law provides
special tax treatment for contributions to and distributions from
qualified tuition programs under Section 529. The purpose of these
programs is to encourage saving for the higher education expenses of
designated beneficiaries. However, current law is unclear in certain
situations with regard to the transfer tax consequences of changing the
designated beneficiary of a qualified tuition program account. In
addition, current law creates opportunities for inappropriate use of
these accounts. The proposal would simplify the tax consequences under
these programs and
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promote use of these accounts to save for higher education. The most
significant change made by this proposal is the elimination of
substantially all post-contribution transfer taxes, thus permitting tax-
free changes of the designated beneficiary of an account, without
limitation as to the relationship or number of generations between the
current and former beneficiaries. Any distribution used to pay the
beneficiary's qualified higher education expenses would continue to be
tax-free. However, to eliminate the potential transfer tax benefit of
using an account for purposes not intended by the statute, the principal
portion of any distribution that is not used for higher education
expenses generally would be subject to a new excise tax (payable from
the account) once the cumulative amount of these distributions exceeds a
stated amount per beneficiary. Distributions from an account would be
permitted to be made only to or for the benefit of the designated
beneficiary. However, a contributor who sets up an account would be
permitted to withdraw funds from the account during the contributor's
life, subject to income tax on the income portion of the withdrawal. The
income portion of a withdrawal by the account's contributor generally
also would be subject to an additional tax to discourage individuals
from using these accounts to save for retirement. The proposal would be
effective for Section 529 accounts established after the date of
enactment, and no additional contributions would be permitted to
preexisting Section 529 savings accounts unless those accounts elect to
be governed by the new rules.
TAX ADMINISTRATION, UNEMPLOYMENT INSURANCE, AND OTHER
Improve Tax Administration
Implement IRS administrative reforms.--The proposed modification to
the IRS Restructuring and Reform Act of 1998 is comprised of five parts.
The first part modifies employee infractions subject to mandatory
termination and permits a broader range of available penalties. It
strengthens taxpayer privacy while reducing employee anxiety resulting
from unduly harsh discipline or unfounded allegations. The second part
adopts measures to curb frivolous submissions and filings that are
intended to impede or delay tax administration. The third part allows
the IRS to terminate installment agreements when taxpayers fail to make
timely tax deposits and file tax returns on current liabilities. The
fourth part streamlines jurisdiction over collection due process cases
in the Tax Court, thereby simplifying procedures and reducing the cycle
time for certain collection due process cases. The fifth part eliminates
the requirement that the IRS Chief Counsel provide an opinion for any
accepted offer-in-compromise of unpaid tax (including interest and
penalties) equal to or exceeding $50,000. This proposal requires that
the Secretary of the Treasury establish standards to determine when an
opinion is appropriate.
Initiate IRS cost saving measures.--The Administration has two
proposals to improve IRS efficiency and performance from current
resources. The first proposal modifies the way that Financial Management
Services (FMS) recovers its transaction fees for processing IRS levies
by permitting FMS to retain a portion of the amount collected before
transmitting the balance to the IRS, thereby reducing government
transaction costs. The offset amount would be included as part of the
15-percent limit on levies against income and would also be credited
against the taxpayer's liability. The second proposal would encourage
increased electronic filing of income tax returns by extending the April
filing date for electronically filed income tax returns to April 30th,
provided that any tax due is also paid electronically. The proposal also
would provide the IRS additional authority to require electronic filing.
This proposal would allow the IRS to process more returns and payments
efficiently.
Allow IRS to access information in the National Directory of New Hires
for tax administration purposes.--The National Directory of New Hires
(NDNH), an electronic database maintained by the Department of Health
and Human Services, contains timely, uniformly compiled employment data
from State agencies across the country. Currently, the IRS may obtain
data from the NDNH, but only for limited purposes. Access to NDNH data
for tax administration purposes generally would make the IRS more
productive by reducing the amount of resources it must dedicate to
obtaining and processing data. The Administration proposes to amend the
Social Security Act to allow the IRS access to NDNH data for general tax
administration purposes, including data matching, verification of
taxpayer claims during return processing, preparation of substitute
returns for non-compliant taxpayers, and identification of levy sources.
Data obtained by the IRS from the NDNH would be protected by existing
taxpayer privacy law, including civil and criminal sanctions. The
proposal would be effective on the date of enactment.
Extend IRS authority to fund undercover operations.--Current law
places the IRS on equal footing with other Federal Law enforcement
agencies by permitting the IRS to fund certain necessary and reasonable
expenses of undercover operations. These undercover operations include
international and domestic money laundering and narcotics operations.
The Administration proposes to extend this funding authority, which will
expire on December 31, 2005, through December 31, 2010.
Strengthen Financial Integrity of Unemployment Insurance
Strengthen the financial integrity of the unemployment insurance
system by reducing improper benefit payments and tax avoidance.--The
Administration has a five-part proposal to strengthen the financial
integrity of the unemployment insurance (UI) sys
[[Page 294]]
tem. The Administration's proposal will boost States' incentives to
recover benefit overpayments by permitting them to use a portion of
recovered funds on fraud and error reduction. The proposal would also
require States to impose a monetary penalty on UI fraud, which would be
used to reduce overpayments; permit more active participation by private
collection agencies in the recovery of overpayments and delinquent
employer taxes; require States to charge employers when their actions
lead to overpayments; and collect delinquent UI overpayments through
garnishment of Federal tax refunds. These efforts to strengthen the
financial integrity of the UI system will keep State UI taxes down and
improve the solvency of the State trust funds.
Other Proposals
Modify pesticide registration fee.--The Environmental Protection
Agency has the authority and has promulgated a rule to collect fees for
the registration of new pesticides. The collection of this fee has been
blocked through appropriations acts since 1989. Most recently,
provisions in the 2004 Consolidated Appropriations Act suspended this
authority through 2010. The Administration proposes to eliminate the
prohibition on the collection of the fee beginning in 2006 and to
reclassify the fee as offsetting receipts.
Increase Indian gaming activity fees.--The National Indian Gaming
Commission regulates and monitors gaming operations conducted on Indian
lands. Since 1998, the Commission has been prohibited from collecting
more than $8 million in annual fees from gaming operations to cover the
costs of its oversight responsibilities. The Administration proposes to
amend the current fee structure so that the Commission can adjust its
activities to the growth in the Indian gaming industry.
REAUTHORIZE FUNDING FOR THE HIGHWAY TRUST FUND
Extend excise taxes deposited in the Highway Trust Fund.--Excise taxes
imposed on nonaviation gasoline, diesel fuel, kerosene, special motor
fuels, heavy highway vehicles, and tires for heavy highway vehicles are
generally deposited in the Highway Trust Fund. Tax is imposed on
nonaviation gasoline at a rate of 18.4 cents per gallon, on diesel fuel
and kerosene at a rate of 24.4 cents per gallon, and on special motor
fuels at varying rates. The tax rates are scheduled to fall, generally
by 0.1 cent per gallon, on April 1, 2005 (reflecting the scheduled
expiration of the LUST Trust Fund tax) and to 4.3 cents per gallon (or
comparable rates in the case of special motor fuels) on October 1, 2005.
A tax equal to 12 percent of the sales price is imposed on the first
retail sale of heavy highway vehicles (generally, trucks with a gross
weight greater than 33,000 pounds, trailers with a gross weight greater
than 26,000 pounds, and highway tractors). In addition, a highway use
tax of up to $550 per year is imposed on highway vehicles with a gross
weight of at least 55,000 pounds. A tax is also imposed on tires with a
rated load capacity exceeding 3,500 pounds, generally at a rate of 0.945
cent per pound of excess. The taxes on heavy highway vehicles and tires
for heavy highway vehicles are scheduled to expire on September 30,
2005. The Administration proposes to extend the taxes on nonaviation
gasoline, diesel fuel and kerosene, and special motor fuels at their
current rates, except to the extent attributable to the LUST Trust Fund
tax, through September 30, 2011. The Administration also proposes to
extend the taxes on heavy highway vehicles and tires for heavy highway
vehicles at their current rates through September 30, 2011.
Allow tax-exempt financing for private highway projects and rail-truck
transfer facilities.--Interest on bonds issued by State and local
governments to finance activities carried out and paid for by private
persons (private activity bonds) is taxable unless the activities are
specified in the Internal Revenue Code. The volume of certain tax-exempt
private activity bonds that State and local governments may issue in
each calendar year is limited by state-wide volume limits. The
Administration proposes to provide authority to issue an aggregate of
$15 billion of tax-exempt private activity bonds beginning in 2005 for
the development of highway facilities and surface freight transfer
facilities. Highway facilities eligible for financing would consist of
any surface transportation project eligible for Federal assistance under
Title 13 of the United States Code, or any project for an international
bridge or tunnel for which an international entity authorized under
Federal or State law is responsible. Surface freight transfer facilities
would consist of facilities for the transfer of freight from truck to
rail or rail to truck, including any temporary storage facilities
directly related to those transfers. The Secretary of Transportation
would allocate the $15 billion, which would not be subject to the
aggregate annual state private activity bond volume limit, among
competing projects.
PROMOTE TRADE
Implement free trade agreements with Bahrain, Panama, and the
Dominican Republic.--Free trade agreements are expected to be completed
with Bahrain, Panama, and the Dominican Republic in 2005, with ten-year
implementation to begin in fiscal year 2006. These agreements will
continue the Administration's effort to use free trade agreements to
benefit U.S. consumers and producers as well as strengthen the economies
of our partner countries.
EXTEND EXPIRING PROVISIONS
Extend permanently the research and experimentation (R&E) tax
credit.--The Administration proposes to extend permanently the 20-
percent tax credit for qualified research and experimentation
expenditures above a base amount and the alternative incremental credit,
which are scheduled to expire on December 31, 2005.
[[Page 295]]
Extend and modify the work opportunity tax credit and the welfare-to-
work tax credit.--Under present law, the work opportunity tax credit
provides incentives for hiring individuals from certain targeted groups.
The credit generally applies to the first $6,000 of wages paid to
several categories of economically disadvantaged or handicapped workers.
The credit rate is 25 percent of qualified wages for employment of at
least 120 hours but less than 400 hours and 40 percent for employment of
400 or more hours. The credit is available for a qualified individual
who begins work before January 1, 2006.
Under present law, the welfare-to-work tax credit provides an
incentive for hiring certain recipients of long-term family assistance.
The credit is 35 percent of up to $10,000 of eligible wages in the first
year of employment and 50 percent of wages up to $10,000 in the second
year of employment. Eligible wages include cash wages plus the cash
value of certain employer-paid health, dependent care, and educational
fringe benefits. The minimum employment period that employees must work
before employers can claim the credit is 400 hours. This credit is
available for qualified individuals who begin work before January 1,
2006.
The Administration proposes to simplify employment incentives by
combining the credits into one credit and making the rules for computing
the combined credit simpler. The credits would be combined by creating a
new welfare-to-work targeted group under the work opportunity tax
credit. The minimum employment periods and credit rates for the first
year of employment under the present work opportunity tax credit would
apply to welfare-to-work employees. The maximum amount of eligible wages
would continue to be $10,000 for welfare-to-work employees and $6,000
for other targeted groups. In addition, the second year 50-percent
credit currently available under the welfare-to-work credit would
continue to be available for welfare-to-work employees under the
modified work opportunity tax credit. Qualified wages would be limited
to cash wages. The work opportunity tax credit would also be simplified
by eliminating the need to determine family income for qualifying ex-
felons (one of the present targeted groups). The modified work
opportunity tax credit would apply to individuals who begin work after
December 31, 2005 and before January 1, 2007.
Extend the first-time homebuyer credit for the District of Columbia.--
A one-time nonrefundable $5,000 credit is available to purchasers of a
principal residence in the District of Columbia who have not owned a
residence in the District during the year preceding the purchase. The
credit phases out for taxpayers with modified adjusted gross income
between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
The credit does not apply to purchases after December 31, 2005. The
Administration proposes to extend the credit for one year, making the
credit available with respect to purchases after December 31, 2005 and
before January 1, 2007.
Extend authority to issue Qualified Zone Academy Bonds.--Current law
allows State and local governments to issue ``qualified zone academy
bonds,'' the interest on which is effectively paid by the Federal
government in the form of an annual income tax credit. The proceeds of
the bonds have to be used for teacher training, purchases of equipment,
curriculum development, or rehabilitation and repairs at certain public
school facilities. A nationwide total of $400 million of qualified zone
academy bonds were authorized to be issued in each of calendar years
1998 through 2005. In addition, unused authority arising in 1998 and
1999 can be carried forward for up to three years and unused authority
arising in 2000 through 2005 can be carried forward for up to two years.
The Administration proposes to authorize the issuance of an additional
$400 million of qualified zone academy bonds in calendar years 2006;
unused authority could be carried forward for up to two years. Reporting
of issuance would be required.
Extend deduction for corporate donations of computer technology.--The
charitable contribution deduction that may be claimed by corporations
for donations of inventory property generally is limited to the lesser
of fair market value or the corporation's basis in the property.
However, corporations are provided augmented deductions, not subject to
this limitation, for certain contributions. Under current law, an
augmented deduction is provided for contributions of computer technology
and equipment to public libraries and to U.S. schools for educational
purposes in grades K-12. The Administration proposes to extend the
deduction, which expires with respect to donations made after December
31, 2005, to apply to donations made before January 1, 2007.
Extend provisions permitting disclosure of tax return information
relating to terrorist activity.--Current law permits disclosure of tax
return information relating to terrorism in two situations. The first is
when an executive of a Federal law enforcement or intelligence agency
has reason to believe that the return information is relevant to a
terrorist incident, threat or activity and submits a written request.
The second is when the IRS wishes to apprise a Federal law enforcement
agency of a terrorist incident, threat or activity. The Administration
proposes to extend this disclosure authority, which will expire on
December 31, 2005, through December 31, 2006.
Extend excise taxes deposited in the Leaking Underground Storage Tank
(LUST) Trust Fund.--An excise tax is imposed, generally at a rate of 0.1
cents per gallon, on gasoline and other liquid motor fuels used on
highways, in aviation, on inland waterways, and in diesel-powered
trains. The tax is deposited in the LUST Trust Fund. The tax is
scheduled to expire on March 31, 2005. The Administration proposes to
extend the tax at the current rate through March 31, 2007.
[[Page 296]]
Extend abandoned mine reclamation fees.--Collections from abandoned
mine reclamation fees are allocated to States and Tribes for reclamation
grants. Current fees of 35 cents per ton for surface mined coal, 15
cents per ton for underground mined coal, and 10 cents per ton for
lignite coal are scheduled to expire on June 30, 2005. Abandoned mine
land problems are expected to exist in certain States after all the
money from the collection of fees under current law is expended. The
Administration proposes to extend these fees. The Administration also
proposes to modify the authorization language to allocate more of the
receipts collected toward restoration of abandoned coal mine land.
Extend excise tax on coal at current rates.--Excise taxes levied on
coal mined and sold for use in the United States are deposited in the
Black Lung Disability Trust Fund. Amounts deposited in the Fund are used
to cover the cost of program administration and compensation, medical,
and survivor benefits to eligible miners and their survivors, when mine
employment terminated prior to 1970 or when no mine operator can be
assigned liability. Current tax rates on coal sold by a producer are
$1.10 per ton of coal from underground mines and $0.55 per ton of coal
from surface mines; however, these rates may not exceed 4.4 percent of
the price at which the coal is sold. Effective for coal sold after
December 31, 2013, the tax rates on coal from underground mines and
surface mines will decline to $0.50 per ton and $0.25 per ton,
respectively, and will be capped at 2 percent of the price at which the
coal is sold. The Administration proposes to repeal the reduction in
these tax rates effective for sales after December 31, 2013, and keep
current rates in effect until the Black Lung Disability Trust Fund debt
is repaid.
Table 17-3. EFFECT OF PROPOSALS ON RECEIPTS
(in millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 2010 2006-10 2006-15
--------------------------------------------------------------------------------------------------------------------------------------------------------
Make Permanent Certain Tax Cuts Enacted in 2001 and 2003
(assumed in the baseline):
Dividends tax rate structure.............................. 309 509 547 537 -16,725 -568 -15,700 -102,905
Capital gains tax rate structure.......................... ......... ......... ......... -5,268 -7,473 -5,076 -17,817 -59,016
Expensing for small business.............................. ......... ......... ......... -3,402 -5,417 -4,073 -12,892 -21,897
Marginal individual income tax rate reductions............ ......... ......... ......... ......... ......... ......... ......... -502,228
Child tax credit \1\...................................... ......... ......... ......... ......... ......... ......... ......... -96,777
Marriage penalty relief \2\............................... ......... ......... ......... ......... ......... ......... ......... -36,029
Education incentives...................................... ......... ......... ......... ......... ......... 3 3 -8,687
Repeal of estate and generation-skipping transfer taxes,
and
modification of gift taxes.............................. 4 -557 -910 -1,514 -1,847 -2,192 -7,020 -256,057
Modifications of pension plans............................ ......... ......... ......... ......... ......... ......... ......... -2,323
Other incentives for families and children................ ......... ......... ......... ......... ......... 5 5 -3,594
-----------------------------------------------------------------------------------------
Total make permanent certain tax cuts enacted in
2001 and 2003....................................... 313 -48 -363 -9,647 -31,462 -11,901 -53,421 -1,089,513
Tax Incentives:
Simplify and encourage saving:
Expand tax-free savings opportunities..................... ......... 3,709 7,151 4,069 1,693 199 16,821 1,461
Consolidate employer-based savings accounts............... ......... -224 -335 -357 -382 -411 -1,709 -14,816
Establish Individual Development Accounts (IDAs).......... ......... ......... -134 -286 -326 -300 -1,046 -1,763
-----------------------------------------------------------------------------------------
Total simplify and encourage saving................... ......... 3,485 6,682 3,426 985 -512 14,066 -15,118
Invest in health care:
Provide a refundable tax credit for the purchase of health
insurance \3\........................................... ......... -19 -1,435 -1,543 -1,370 -1,241 -5,608 -9,897
Provide an above-the-line deduction for high-deductible
insurance premiums...................................... ......... -200 -2,029 -2,316 -2,636 -2,876 -10,057 -28,495
Provide a refundable tax credit for contributions of small
employers to employee HSAs \4\.......................... ......... -61 -304 -834 -1,545 -2,025 -4,769 -17,760
Improve the Health Coverage Tax Credit \5\................ ......... ......... -3 -4 -5 -5 -17 -49
Allow the orphan drug tax credit for certain pre-
designation
expenses................................................ ......... ......... ......... ......... ......... ......... -1 -3
-----------------------------------------------------------------------------------------
Total invest in health care........................... ......... -280 -3,771 -4,697 -5,556 -6,147 -20,452 -56,204
Provide incentives for charitable giving:
Permit tax-free withdrawals from IRAs for charitable
contributions........................................... -70 -335 -318 -318 -313 -304 -1,588 -3,095
Expand and increase the enhanced charitable deduction
for contributions of food inventory..................... -42 -87 -96 -106 -116 -127 -532 -1,388
Reform excise tax based on investment income of private
foundations............................................. ......... -148 -98 -105 -111 -119 -581 -1,321
Modify tax on unrelated business taxable income of
charitable remainder trusts............................. -6 -5 -6 -6 -6 -7 -30 -69
[[Page 297]]
Modify basis adjustment to stock of S corporations
contributing appreciated property....................... -4 -20 -21 -25 -28 -32 -126 -354
Repeal the $150 million limitation on qualified
501(c)(3) bonds......................................... -3 -6 -10 -11 -10 -10 -47 -92
Repeal certain restrictions on the use of qualified
501(c)(3) bonds for residential rental property......... ......... -2 -5 -9 -16 -24 -56 -278
-----------------------------------------------------------------------------------------
Total provide incentives for charitable giving........ -125 -603 -554 -580 -600 -623 -2,960 -6,597
Strengthen education:
Extend, increase, and expand the above-the-line deduction
for qualified out-of-pocket classroom expenses.......... ......... -27 -267 -279 -282 -285 -1,140 -2,630
Encourage telecommuting:
Exclude from income the value of employer-provided
computers, software, and peripherals.................... ......... -29 -50 -50 -55 -65 -249 -767
Provide assistance to distressed areas:
Establish Opportunity Zones............................... ......... -433 -806 -853 -899 -912 -3,903 -9,594
Provide disaster relief:
Provide tax relief for FEMA hazard mitigation assistance
programs................................................ -20 -40 -40 -40 -40 -40 -200 -400
Increase housing opportunities:
Provide tax credit for developers of affordable single-
family
housing................................................. ......... -7 -84 -342 -815 -1,425 -2,673 -17,370
Protect the environment:
Extend permanently expensing of brownfields remediation
costs................................................... ......... -138 -215 -203 -195 -184 -935 -1,743
Exclude 50 percent of gains from the sale of property for
conservation purposes................................... ......... -47 -92 -105 -60 ......... -304 -304
-----------------------------------------------------------------------------------------
Total protect the environment......................... ......... -185 -307 -308 -255 -184 -1,239 -2,047
Increase energy production and promote energy
conservation:
Extend the tax credit for producing electricity from wind,
biomass, and landfill gas and modify the tax credit for
electricity from biomass................................ -48 -144 -321 -260 -160 -163 -1,048 -1,779
Provide tax credit for residential solar energy systems... -5 -11 -19 -24 -34 -16 -104 -104
Modify treatment of nuclear decommissioning funds......... -47 -166 -162 -170 -177 -183 -858 -1,881
Provide tax credit for purchase of certain hybrid and fuel
cell vehicles \6\....................................... -13 -260 -447 -614 -680 -23 -2,024 -2,532
Provide tax credit for combined heat and power property... -17 -109 -84 -105 -114 -36 -448 -394
-----------------------------------------------------------------------------------------
Total increase energy production and promote
energy conservation................................. -130 -690 -1,033 -1,173 -1,165 -421 -4,482 -6,690
Restructure assistance to New York City:
Provide tax incentives for transportation infrastructure.. ......... -200 -200 -200 -200 -200 -1,000 -2,000
Repeal certain New York City Liberty Zone incentives...... ......... 200 200 200 200 200 1,000 2,000
-----------------------------------------------------------------------------------------
Total restructure assistance to New York City......... ......... ......... ......... ......... ......... ......... ......... ...........
-----------------------------------------------------------------------------------------
Total tax incentives.............................. -275 1,191 -230 -4,896 -8,682 -10,614 -23,232 -117,417
Simplify the Tax Laws for Families:
Simplify adoption tax benefits.............................. ......... -4 -40 -42 -43 -45 -174 -426
Clarify eligibility of siblings and other family members for
child
related tax benefits \7\.................................. 11 51 78 77 60 40 306 536
-----------------------------------------------------------------------------------------
Total simplify the tax laws for families................ 11 47 38 35 17 -5 132 110
Strengthen the Employer-Based Pension System:
Ensure fair treatment of older workers in cash balance
conversions and protect defined benefit plans............. ......... 57 62 78 92 104 393 1,096
Strengthen funding for single-employer pension plans........ ......... 151 1,432 -869 -2,699 -1,762 -3,747 -12,735
Reflect market interest rates in lump sum payments.......... ......... ......... -3 -8 -15 -20 -46 -241
-----------------------------------------------------------------------------------------
Total strengthen the employer-based pension system...... ......... 208 1,491 -799 -2,622 -1,678 -3,400 -11,880
Close Loopholes and Improve Tax Compliance:
Combat abusive foreign tax credit transactions.............. 1 2 2 2 2 3 11 26
Modify the active trade or business test.................... 2 6 8 8 8 8 38 87
Impose penalties on charities that fail to enforce
conservation
easements................................................. 3 8 8 8 9 9 42 96
[[Page 298]]
Eliminate the special exclusion from unrelated business
taxable
income for gain or loss on the sale or exchange of certain
brownfields............................................... 1 4 12 23 37 49 125 242
Apply an excise tax to amounts received under certain life
insurance contracts....................................... 2 7 12 17 23 28 87 323
Limit related party interest deductions..................... 74 128 134 141 148 155 706 1,607
Clarify and simplify qualified tuition programs............. ......... 4 12 13 14 20 63 222
-----------------------------------------------------------------------------------------
Total close loopholes and improve tax compliance........ 83 159 188 212 241 272 1,072 2,603
Tax Administration, Unemployment Insurance, and Other:
Improve tax administration:
Implement IRS administrative reforms and initiate cost
saving measures \8\..................................... ......... ......... ......... ......... ......... ......... ......... ...........
Strengthen financial integrity of unemployment
insurance:
Strengthen the financial integrity of the unemployment
insurance system by reducing improper benefit payments
and tax avoidance \6\................................... ......... ......... 6 -6 -129 -530 -659 -2,856
Other proposals:
Modify pesticide registration fee......................... ......... ......... ......... ......... ......... ......... ......... -152
Increase Indian gaming activity fees...................... ......... ......... 4 4 5 5 18 43
-----------------------------------------------------------------------------------------
Total tax administration, unemployment insurance,
and other............................................. ......... ......... 10 -2 -124 -525 -641 -2,965
Reauthorize Funding for the Highway Trust Fund:
Extend excise taxes deposited in the Highway Trust Fund \6\. ......... 10 11 11 11 11 54 65
Allow tax-exempt financing for private highway projects and
rail-truck transfer facilities............................ -5 -22 -47 -75 -92 -97 -333 -601
-----------------------------------------------------------------------------------------
Total reauthorize funding for the Highway Trust Fund.... -5 -12 -36 -64 -81 -86 -279 -536
Promote Trade:
Implement free trade agreements with Bahrain, Panama and
the Dominican Republic \6\.............................. ......... -56 -84 -91 -97 -102 -430 -976
Extend Expiring Provisions:
Research & Experimentation (R&E) tax credit............... ......... -2,097 -4,601 -5,944 -6,889 -7,669 -27,200 -76,225
Combined work opportunity/welfare-to-work tax credit...... ......... -131 -166 -65 -16 -5 -383 -383
First-time homebuyer credit for DC........................ ......... -1 -18 ......... ......... ......... -19 -19
Authority to issue Qualified Zone Academy Bonds........... ......... -3 -8 -13 -18 -20 -62 -162
Deduction for corporate donations of computer technology.. ......... -73 -49 ......... ......... ......... -122 -122
Disclosure of tax return information related to terrorist
activity \8\............................................ ......... ......... ......... ......... ......... ......... ......... ...........
LUST Trust Fund taxes \6\................................. 74 152 77 ......... ......... ......... 229 229
Abandoned mine reclamation fees........................... ......... 304 312 318 322 323 1,579 3,230
Excise tax on coal \6\.................................... ......... ......... ......... ......... ......... ......... ......... 479
-----------------------------------------------------------------------------------------
Total extend expiring provisions...................... 74 -1,849 -4,453 -5,704 -6,601 -7,371 -25,978 -72,973
Total budget proposals, including proposals assumed in the 201 -360 -3,439 -20,956 -49,411 -32,010 -106,177 -1,293,547
baseline...................................................
Total budget proposals, excluding proposals assumed in the -112 -312 -3,076 -11,309 -17,949 -20,109 -52,756 -204,034
baseline...................................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $37,319 million for 2006-2015.
\2\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $7,491 million for 2006-2015.
\3\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $78 million for 2006, $3,660 million for 2007, $5,514
million for 2008, $6,529 million for 2009, $7,035 million for 2010, $22,816 million for 2006-2010 and $64,078 million for 2006-2015.
\4\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $18 million for 2006, $87 million for 2007, $237
million for 2008, $392 million for 2009, $589 million for 2010, $1,323 million for 2006-2010 and $4,930 million for 2006-2015.
\5\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $3 million for 2006, $10 million for 2007, $11
million for 2008, $13 million for 2009, $14 million for 2010, $51 million for 2006-2010 and $130 million for 2006-2015.
\6\ Net of income offsets.
\7\ Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$115 million for 2006, -$150 million for 2007, -$168
million for 2008, -$196 million for 2009, -$258 million for 2010, -$887 million for 2006-2010 and -$2,239 million for 2006-2015.
\8\ No net budgetary impact.
[[Page 299]]
Table 17-4. RECEIPTS BY SOURCE
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
Source 2004 -----------------------------------------------------------------------
Actual 2005 2006 2007 2008 2009 2010
----------------------------------------------------------------------------------------------------------------
Individual income taxes
(federal funds):
Existing law.............. 808,959 893,698 964,283 1,069,364 1,177,249 1,280,242 1,370,919
Proposed Legislation.... .......... 6 2,594 1,805 -10,076 -35,103 -17,644
-----------------------------------------------------------------------------------
Total individual income 808,959 893,704 966,877 1,071,169 1,167,173 1,245,139 1,353,275
taxes......................
===================================================================================
Corporation income taxes:
Federal funds:
Existing law............ 189,370 226,431 222,811 234,112 252,724 264,958 270,000
Proposed Legislation.. .......... 95 -2,553 -4,295 -9,307 -12,595 -12,367
-----------------------------------------------------------------------------------
Total Federal funds 189,370 226,526 220,258 229,817 243,417 252,363 257,633
corporation income taxes.
-----------------------------------------------------------------------------------
Trust funds:
Hazardous substance 1 .......... .......... .......... .......... .......... ..........
superfund..............
-----------------------------------------------------------------------------------
Total corporation income 189,371 226,526 220,258 229,817 243,417 252,363 257,633
taxes......................
===================================================================================
Social insurance and
retirement receipts (trust
funds):
Employment and general
retirement:
Old-age and survivors 457,120 479,891 507,087 537,849 568,092 598,946 635,310
insurance (Off-budget).
Disability insurance 77,625 81,472 86,104 91,333 96,469 101,708 107,883
(Off-budget)...........
Hospital insurance...... 150,589 161,360 172,135 182,412 193,079 204,007 216,710
Railroad retirement:
Social Security 1,729 1,726 1,760 1,778 1,819 1,853 1,891
equivalent account...
Rail pension and 2,297 2,187 2,209 2,252 2,192 2,203 2,364
supplemental annuity.
-----------------------------------------------------------------------------------
Total employment and 689,360 726,636 769,295 815,624 861,651 908,717 964,158
general retirement.......
-----------------------------------------------------------------------------------
On-budget............... 154,615 165,273 176,104 186,442 197,090 208,063 220,965
Off-budget.............. 534,745 561,363 593,191 629,182 664,561 700,654 743,193
-----------------------------------------------------------------------------------
Unemployment insurance:
Deposits by States \1\ . 32,605 35,371 37,513 38,870 39,620 40,399 42,420
Proposed Legislation.. .......... .......... .......... 7 -7 -162 -662
Federal unemployment 6,718 7,009 7,357 7,181 6,011 5,798 6,124
receipts \1\ ..........
Railroad unemployment 130 96 86 101 124 132 121
receipts \1\ ..........
-----------------------------------------------------------------------------------
Total unemployment 39,453 42,476 44,956 46,159 45,748 46,167 48,003
insurance................
-----------------------------------------------------------------------------------
Other retirement:
Federal employees' 4,543 4,574 4,540 4,400 4,301 4,153 4,038
retirement--employee
share..................
Non-Federal employees 51 45 43 39 36 33 30
retirement \2\ ........
-----------------------------------------------------------------------------------
Total other retirement.... 4,594 4,619 4,583 4,439 4,337 4,186 4,068
-----------------------------------------------------------------------------------
Total social insurance and 733,407 773,731 818,834 866,222 911,736 959,070 1,016,229
retirement receipts........
===================================================================================
On-budget................. 198,662 212,368 225,643 237,040 247,175 258,416 273,036
Off-budget................ 534,745 561,363 593,191 629,182 664,561 700,654 743,193
===================================================================================
Excise taxes:
Federal funds:
Alcohol taxes........... 8,105 7,909 8,056 8,190 8,330 8,579 8,716
Proposed Legislation.. .......... .......... -56 -19 .......... .......... ..........
Tobacco taxes........... 7,926 7,899 7,732 7,590 7,459 7,325 7,202
Transportation fuels tax 1,381 -526 -1,325 -1,417 -1,460 -1,481 -1,500
Proposed Legislation.. .......... .......... 12 13 13 13 14
Telephone and teletype 5,997 6,485 6,881 7,292 7,717 8,158 8,619
services...............
Other Federal fund 1,157 1,373 1,329 1,370 1,423 1,478 1,533
excise taxes...........
Proposed Legislation.. .......... -1,089 -1,206 -1,214 -1,268 -1,301 -1,333
-----------------------------------------------------------------------------------
Total Federal fund excise 24,566 22,051 21,423 21,805 22,214 22,771 23,251
taxes....................
-----------------------------------------------------------------------------------
Trust funds:
Highway................. 34,711 37,792 39,119 39,908 40,630 41,315 41,989
Proposed Legislation.. .......... 1,089 1,107 1,119 1,137 1,151 1,160
[[Page 300]]
Airport and airway...... 9,174 10,517 11,319 11,996 12,651 13,346 14,077
Aquatic resources....... 416 424 426 439 451 466 479
Tobacco................. .......... 1,098 1,089 964 964 964 964
Black lung disability 566 584 601 618 636 650 660
insurance..............
Inland waterway......... 91 91 92 93 93 94 95
Vaccine injury 142 170 188 192 194 196 199
compensation...........
Leaking underground 189 97 .......... .......... .......... .......... ..........
storage tank...........
Proposed Legislation.. .......... 100 202 103 .......... .......... ..........
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Total trust funds excise 45,289 51,962 54,143 55,432 56,756 58,182 59,623
taxes....................
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Total excise taxes.......... 69,855 74,013 75,566 77,237 78,970 80,953 82,874
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Estate and gift taxes:
Federal funds............. 24,831 23,754 26,810 24,628 25,973 27,625 21,509
Proposed Legislation.... .......... .......... -689 -1,162 -1,649 -1,612 -1,371
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Total estate and gift taxes. 24,831 23,754 26,121 23,466 24,324 26,013 20,138
===================================================================================
Customs duties:
Federal funds............. 20,143 22,100 25,643 27,954 29,918 31,861 33,195
Proposed Legislation.... .......... 1,608 1,540 1,512 734 736 739
Trust funds............... 940 966 1,073 1,170 1,246 1,295 1,345
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Total customs duties........ 21,083 24,674 28,256 30,636 31,898 33,892 35,279
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MISCELLANEOUS RECEIPTS: \3\
Miscellaneous taxes....... 96 100 110 106 106 106 106
Proposed Legislation.... .......... .......... .......... 4 4 5 5
United Mine Workers of 127 96 119 128 125 122 119
America combined benefit
fund.....................
Deposit of earnings, 19,652 24,102 28,528 32,197 36,076 39,441 42,239
Federal Reserve System...
Defense cooperation....... 13 7 7 8 8 8 8
Confiscated Assets........ 18 .......... .......... .......... .......... .......... ..........
Fees for permits and 8,675 9,625 10,049 10,360 10,316 10,004 10,058
regulatory and judicial
services.................
Proposed Legislation.... .......... .......... 304 312 318 322 323
Fines, penalties, and 3,902 4,252 4,276 4,265 3,551 3,592 3,633
forfeitures..............
Proposed Legislation.... .......... -1,608 -1,615 -1,624 -855 -865 -874
Gifts and contributions... 153 195 188 187 188 190 192
Refunds and recoveries.... -71 -326 -328 -336 -344 -352 -359
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Total miscellaneous receipts 32,565 36,443 41,638 45,607 49,493 52,573 55,450
===================================================================================
Total budget receipts....... 1,880,071 2,052,845 2,177,550 2,344,154 2,507,011 2,650,003 2,820,878
On-budget................. 1,345,326 1,491,482 1,584,359 1,714,972 1,842,450 1,949,349 2,077,685
Off-budget................ 534,745 561,363 593,191 629,182 664,561 700,654 743,193
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MEMORANDUM
Federal funds............. 1,100,875 1,228,758 1,307,760 1,423,134 1,539,578 1,633,820 1,746,109
Trust funds............... 495,410 545,688 637,748 665,392 694,810 727,810 765,078
Interfund transactions.... -250,959 -282,964 -361,149 -373,554 -391,938 -412,281 -433,502
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Total on-budget............. 1,345,326 1,491,482 1,584,359 1,714,972 1,842,450 1,949,349 2,077,685
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Off-budget (trust funds).... 534,745 561,363 593,191 629,182 664,561 700,654 743,193
===================================================================================
Total....................... 1,880,071 2,052,845 2,177,550 2,344,154 2,507,011 2,650,003 2,820,878
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\1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
adminstrative costs of the program for the railroads.
\2\ Represents employer and employee contributions to the civil service retirement and disability fund for
covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
government.
\3\ Includes both Federal and trust funds.