* Created a new three-part test for defining a "child" for purpose of the dependency exemption (when a child does not provide a majority of his own support) effective 2005. An individual is a qualifying child if he satisfies the residency, relationship and age tests. The residency test is met by having the same principal place of abode for more than one-half of the year, ignoring temporary absences caused by illness, education, business, vacation or military service. The relationship test is met by a parent, grandparent, sibling, aunt/uncle and also by a step. It will also be met in the case of a child placed for adoption or a foster child (in the household for the entire year). The age test requires that the child be under 19 (under 24 for a full-time student or any age if the child is permanently and totally disabled). A tie-breaking system is created favoring the parent over any other claimant and, in the case of a child with equal residency with both parents, giving the dependency exemption to the parent with higher adjusted gross income. The ability to waive the dependency exemption in favor of the noncustodial parent remains which waiver would also apply to the child credit. Also continuing is the right to claim an individual other than a "child" as a dependent if not claimed as a child by any other individual and all of the existing tests including majority support and income limitation are satisfied or a multiple support agreement exists.

* Adopted the definition of qualifying child used in determining the dependency exemption for purpose of the child credit, dependent care credit, earned income credit and head of household status; however, the age test remains under 17 for the child credit and remains under 13 unless disabled for the dependent care credit.

* Continued the child credit at $1,000 per qualifying child through 2010 (accelerating from 2005 to 2004 the refundability at 15% of earned income greater than the base ($10,750 for 2004) if less than the excess of social security taxes over the earned income credit in the case of individuals with three or more qualifying children.

* Continued the 10% bracket at the current indexed levels through 2010.

* Continued the 15% bracket and the standard deduction for married couples filing jointly at twice the number for unmarried individuals through 2010.

* Continued the current alternative minimum tax exemptions and the allowance of nonrefundable credits as an offset to AMT liability through 2005.

* Continued the research, work opportunity, welfare-to-work and District of Columbia first time homebuyer credits through 2005.

* Continued the exclusion/deduction for contributions into Medical Savings Accounts and the $250 "above the line" deduction for certain expenses of educators through 2005.

PL 108-357. the American Jobs Creation Act of 2004:

* Expanded the income averaging currently permitted only to farmers so that fisherman are included and effectively permitted averaging for those individuals to be used in determining alternative minimum tax, effective 2004.

* Allowed foreign tax credit to effect 100 percent of alternative minimum tax liability effective 2005.

* Clarified and toughened rules on nonqualified deferred compensation to require inclusion of the compensation in income when earned and not subject to a substantial risk of forfeiture unless election requirements, distribution requirements and non-acceleration requirements are met. The election to defer must be made not later than the close of the preceding tax year (30 days after eligibility in the case of the first year). Nonqualified deferred compensation may not be distributed until the specified dates except on account of death, disability, separation from service (six months later for key employees), change in ownership or unforeseeable emergency (limited to the amount needed to satisfy the emergency grossed up for taxes). Acceleration is not permitted except as may be allowed by regulation. 1RS is also directed by regulations to disregard illusory rights of forfeiture. The new rules are not to apply to bonuses paid within 2 ½ months of year-end or to nonqualified stock options granted at no less than fair market value. A 20 percent penalty applies for failure to include nonqualified deferred compensation in income at the proper time. The provisions are generally effective for amounts deferred after 2004 (or earlier if the plan is materially modified after October 3, 2004).

* Clarified that incentive stock options are not subject to any withholding including PICA or FUTA taxes effective October 23, 2004.

* Created an "above the line" deduction for attorney fees and costs incurred in recovering damages in employment matters effective for expenses after enactment related to settlements or judgments after October 22, 2004.

* Created for 2004 and 2005 a deduction for sales and use tax as an alternative to deducting state income taxes; tables can be used (with additions for vehicles and other specified items) in lieu of retaining records.