General Explanations of the Administration’s Fiscal Year 2005 Revenue Proposals Department of the Treasury February 2004 GENERAL EXPLANATIONS OF THE ADMINISTRATION’S FISCAL YEAR 2005 REVENUE PROPOSALS ...............................................................................................................................................................1 INTRODUCTION..........................................................................................................................................................1 MAKE PERMANENT THE TAX CUTS ENACTED IN 2001 AND 2003 ............................................................3 EXTEND THROUGH 2010 CERTAIN PROVISIONS OF THE 2003 JOBS AND GROWTH TAX CUT.....................................3 PERMANENTLY EXTEND CERTAIN PROVISIONS OF THE 2001 TAX CUT AND THE 2003 JOBS AND GROWTH TAX CUT ..................................................................................................................................................................................5 TAX INCENTIVES.....................................................................................................................................................7 SIMPLIFY AND ENCOURAGE SAVING .........................................................................................................................7 Expand tax-free savings opportunities ...................................................................................................................7 Consolidate employer-based savings accounts ....................................................................................................13 Establish Individual Development Accounts (IDAs) ............................................................................................18 INVEST IN HEALTH CARE.........................................................................................................................................21 Provide refundable tax credit for the purchase of health insurance ....................................................................21 Provide an above-the-line deduction for high deductible insurance premiums ...................................................25 Provide an above-the-line deduction for long-term care insurance premiums ....................................................27 Provide an additional personal exemption to home caregivers of family members .............................................29 Allow the orphan drug tax credit for certain pre-designation expenses...............................................................31 Clarify the Health Coverage Tax Credit ..............................................................................................................32 PROVIDE INCENTIVES FOR CHARITABLE GIVING .....................................................................................................33 Provide charitable contribution deduction for non-itemizers ..............................................................................33 Permit tax-free withdrawals from IRAs for charitable contributions...................................................................34 Expand and increase the enhanced charitable deduction for contributions of food inventory ............................36 Reform excise tax based on investment income of private foundations................................................................38 Modify tax on unrelated business taxable income of charitable remainder trusts ...............................................40 Modify basis adjustment to stock of S corporations contributing appreciated property......................................42 Repeal the $150 million limitation on qualified 501(c)(3) bonds.........................................................................43 Repeal certain restrictions on the use of qualified 501(c)(3) bonds for residential rental property ....................44 STRENGTHEN EDUCATION .......................................................................................................................................46 Extend, increase and expand the above-the-line deduction for qualified out-of-pocket classroom expenses ......46 ENCOURAGE TELECOMMUTING ...............................................................................................................................48 Exclude from income the value of employer-provided computers, software and peripherals..............................48 INCREASE HOUSING OPPORTUNITIES.......................................................................................................................49 Provide tax credit for developers of affordable single-family housing ................................................................49 PROTECT THE ENVIRONMENT ..................................................................................................................................52 Permanently extend expensing of brownfields remediation costs ........................................................................52 Exclude 50 percent of gains from the sale of property for conservation purposes...............................................53 INCREASE ENERGY PRODUCTION AND PROMOTE ENERGY CONSERVATION ............................................................55 Extend and modify the tax credit for producing electricity from certain sources ................................................55 Provide tax credit for residential solar energy systems........................................................................................57 Modify treatment of nuclear decommissioning funds...........................................................................................58 Provide tax credit for purchase of certain hybrid and fuel cell vehicles..............................................................61 Provide tax credit for energy produced from landfill gas ....................................................................................65 Provide tax credit for combined heat and power property...................................................................................67 Extend excise tax exemption (credit) for ethanol..................................................................................................69 Permit electric utilities to defer gain from sales of electric transmission property..............................................70 Modify tax treatment of certain income of electric cooperatives..........................................................................72 SIMPLIFY THE TAX LAWS FOR FAMILIES ....................................................................................................73 Establish uniform definition of a qualifying child ................................................................................................73 Simplify adoption tax benefits...............................................................................................................................80 Eliminate household maintenance test for head-of-household filing status .........................................................82 Reduce computational complexity of refundable child tax credit.........................................................................84 Simplify EITC eligibility requirements regarding filing status, presence of children, investment income and work and immigrant status............................................................................................................................86 i Simplify the taxation of dependents......................................................................................................................91 Consolidate rules for lifetime learning credit, HOPE credit and education expense deductions, and simplify other higher education provisions.................................................................................................................93 Allow annual reporting and payment of combined State and federal unemployment insurance taxes by employers of household employees ...............................................................................................................99 Simplify taxation of capital gains on collectibles, small business stock and other assets ..................................101 STRENGTHEN THE EMPLOYER BASED PENSION SYSTEM....................................................................103 Ensure fair treatment of older workers in cash balance conversions and protect defined benefit plans ...........103 Improve the accuracy of pension liability measures ..........................................................................................107 CLOSE LOOPHOLES AND IMPROVE TAX COMPLIANCE........................................................................111 Combat abusive tax avoidance transactions ......................................................................................................111 Limit related party interest deductions...............................................................................................................115 Modify qualification rules for tax-exempt property casualty insurance companies...........................................116 Increase penalties for false or fraudulent statements made to promote abusive tax shelters.............................119 Prevent abusive overvaluations on donations of patents and other intellectual property..................................120 Prevent overvaluations and other abuses in charitable donations