Other Provisions
Uniform Definition of Child (effective 2005)
The new law creates a uniform definition of qualifying child for the tax benefits that relate to children. Under the new law, a qualifying child must meet only three tests, relationship, residence, and age. These rules are summarized below.
1. Relationship: The child must be the taxpayer's son, daughter, stepchild, sibling, stepsibling, or a descendant of such individuals. Foster children placed with the taxpayer by authorized placement agencies would satisfy the relationship test. If the child is the taxpayer's sibling or stepsibling or a descendant of any such individual, the taxpayer must care for the child as if the child were his or her own child.
2. Residence: The child must live with the taxpayer in the same principal place of abode in the United States for over half the year. Military personnel on extended active duty outside the United States would be considered to be residing in the United States. As under current law, the taxpayer and child are considered to live together even if one or both are temporarily absent due to special circumstances such as illness, education, business, vacation, or military service.
3. Age: The child must be under the age of 19, a full-time student if over age 18 and under age 24, or totally and permanently disabled. However, as under current law, qualifying children (who are not disabled) must be under age 13 for purposes of the child and dependent care tax credit and under 17 (whether or not disabled) to qualify for the child tax credit.
A tie-breaker rule similar to the current EITC tie-breaker applies if more than one qualifying taxpayer claims a benefit for the same child.
This new rule affects the following tax benefits:
- The dependency exemption.
- The child tax credit.
- The earned income credit.
- The dependent care credit.
- Head of household filing status.
Notes:
The prior-law rules are retained for individuals to whom the uniform definition does not apply.
If a child files a joint return the uniform definition rules do not apply. Prior-law rules may be used instead.
S Corporation Provisions
Number of Shareholders. For purposes of the 75 shareholder limitation, all family members (up to six generations) may elect to be treated as one shareholder. In addition, the maximum number of eligible shareholders is increased from 75 to 100. Effective for taxable years beginning after December 31, 2004.
Transfer of Suspended Losses Incident to Divorce. Losses that are suspended because of basis and at risk limitations are transferred to the spouse who receives the stock as part of a divorce settlement. Effective for taxable years beginning after December 31, 2004.
Foreign Income
Foreign Tax Credit Baskets. Beginning in 2007, the foreign tax credit limitation categories of income are reduced from nine to two - passive income and general category income. Note: Taxes paid or accrued in a tax year beginning before 2007 and carried to 2007 or later years are treated as if the new rule applied when the taxes were paid or accrued.
Foreign Tax Credit Carryforward/Carryback. The foreign tax credit carryforward period is extended to 10 years (from five) and the carryback period is reduced to one year (rather than two). The extension of the carryforward period is effective for excess credits that are carried to a tax year ending after the date of enactment. The one year carryback period is effective for excess credits arising in tax years beginning after the date of enactment.
Foreign Tax Credit and AMT. The current 90% limitation on the use of foreign tax credits against corporate AMT is repealed beginning in 2005.
U.S. Possessions - Residence Rules. A two-part test applies for purposes of determining who is a resident of certain U.S. possessions (i.e., Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands).
1. The person must be present in the U.S. possession for 183 days each taxable year,
2. The person must not have a tax home outside the U.S. possession during the year and must not have a closer connection to the United States or a foreign country during the year.
This change is effective for tax years ending after the date of enactment.
