Tax Tip for Summer 2003
Jobs
and Growth Tax Relief Reconciliation Act of 2003
As you probably know, Congress recently passed the
"Jobs and Growth Tax Relief Reconciliation Act of 2003," (“2003
Act”) which contains significant tax cuts for stockholders, individual
taxpayers, couples, and businesses. The purpose of this summary is to provide
you with a brief overview of the new accelerated tax-cut and tax-benefit
provisions. For tax planning purposes, please consider that many of the new laws
contain “sunset” provisions, meaning they are not permanent law changes and
are scheduled to expire over the next few years, unless subsequent law changes
are passed to either extend them or make them permanent.
INDIVIDUALS
Reductions in taxes on capital gains.
An important component of the 2003 Act,
particularly if you are an investor, is a reduction in the taxes on capital
gains. Under the 2003 Act, effective for sales and exchanges (and installment
payments received) after May 5, 2003, and before Jan. 1, 2009, the 10% and 20%
rates on adjusted net capital gain are reduced to 5% (zero, in 2008) and 15%
respectively, for both regular tax and the alternative minimum tax (AMT). The
lower rates apply to sales of capital assets held more than one year. Note,
however, that there is no cut in the 28% capital gains rate affecting
collectibles and certain small business stock, or the 25% rate affecting gains
from depreciation recapture on certain real property.
Reduced rates for dividends.
Effective for dividends received in tax years
beginning after 2002, dividends received by an individual shareholder from a
domestic corporation (or a "qualified foreign corporation") are taxed
at the same rates that apply to capital gains. In other words, the dividends are
taxed at rates of 5% (zero, in 2008) and 15%, see above. These rates apply for
both the regular tax and the AMT. However, some special rules and exclusions
apply. For example, if a shareholder does not hold a share of stock for more
than 60 days during the 120-day period beginning 60 days before the ex-dividend
date (with these periods doubled in the case of preferred stock), dividends
received on the stock aren't eligible for capital gain rates.
Note that while qualifying dividends may be taxed
at the same rate as capital gains, these dividends cannot be offset by capital
losses.
Also note that interest earned on non-tax-exempt
bonds will continue to be taxed at the higher ordinary income tax rates.
A word of caution should also be mentioned. While
these reduced rates for capital gains and dividends can result in considerable
tax savings, in devising a long-term investment strategy it is important to
remember that these rates aren't permanent. They are scheduled to
"sunset" (i.e., no longer apply) after 2008. Please consult with your
investment advisor regarding the impact of the 2003 Act on your portfolio.
Increase in child tax credit, partially
refundable for 2003.
The child tax credit will increase to $1,000 per
qualifying child (up from $600 per qualifying child for 2003-2004 and $700 for
2005). After 2005, however, the child tax credit will fall back to pre-2003 Act
levels (e.g., to $700 for 2006-2008).
Advance payment this summer.
For 2003, the increased amount of the child tax
credit will be paid in advance beginning in mid-July over a period of three
weeks. This year, a qualifying family with one child will receive an advance
payment check for up to $400, and a qualifying family with two children will
receive a check for up to $800. The amount of advance payments will be based on
the taxpayers' 2002 filing status and income, as well as the number of children
claimed on their 2002 tax return who will still be under age 17 in 2003. Note
that the amount of the credit allowable is reduced or eliminated for taxpayers
with adjusted gross income over $75,000 for singles and heads of household, and
$110,000 for married couples.
Accelerated reduction of tax brackets above 15%.
Retroactive to Jan. 1, 2003, and until 2011, the
individual income tax brackets will be 10%, 15%, 25%, 28%, 33%, and 35% (the
highest four brackets are down from 27%, 30%, 35%, and 38.6%). After 2010, rates
above 15% will revert back to 28%, 31%, 36%, and 39.6%.
Accelerated expansion of the 10% rate bracket.
Under the 2003 Act, the 10% tax bracket for 2003
ends at $14,000 (up from $12,000) of taxable income for joint filers and $7,000
(up from $6,000) for single filers and marrieds filing separately. The 10%
bracket for heads-of-household is unchanged (it will continue to end at $12,000
of taxable income). From 2005 through 2007, the end point of the 10% bracket
will revert to the $12,000/$6,000 levels (and will go up to $14,000/$7,000 for
2008 through 2010).
Marriage-penalty relief.
Beginning in 2003, the basic standard deduction
amount for joint returns will be double ($9,500 for 2003) the basic standard
deduction amount for single returns. However, for tax years beginning after
2004, a joint return filer's basic standard deduction will revert to pre-2003
Act levels (e.g., for 2005, to 174% of a single return filer's basic standard
deduction).
In 2003 and 2004, the end point of the 15% tax
bracket for joint returns will be twice the end point of the 15% tax bracket for
single returns. In other words, for 2003, the 15% tax bracket for joint filers
applies to taxable income over $14,000 (up from $12,000) but not over $56,800
(up from $47,450). However, for tax years beginning after 2004, the end point
will, like the basic standard deduction amount, revert to pre-2003 Act (e.g.,
for 2005, 180% of the end point of the 15% tax bracket for single returns).
BUSINESSES AND
CORPORATIONS.
The 2003 Act includes two temporary tax breaks designed to encourage immediate
capital expenditures. Under the first of these breaks, small companies can
expense up to $100,000 in new equipment investments through 2005. Under a second
provision, businesses can depreciate more of their assets sooner through 2004.
Vastly liberalized expensing election.
The IRC section 179 expensing election permits
small businesses to expense (i.e., to deduct immediately rather than depreciate
over several years) a certain amount of the cost of depreciable personal
property purchased and placed in service during a tax year in an active trade or
business. Under the 2003 Act, the maximum annual expensing amount is increased
to $100,000 (up from $25,000). Additionally, the maximum annual expensing amount
is reduced by the amount by which the cost of qualifying property placed in
service during the tax year exceeds a specified dollar amount. This dollar level
is increased to $400,000 (from $200,000). These expensing changes are effective
for tax years beginning after 2002 and before 2006.
Increase of bonus first-year depreciation.
In general, under pre-2003 Act law, a 30%
additional first-year bonus depreciation allowance applied to the non-expensed
portion of certain qualified property.
The 2003 Act increases this to a 50% additional
first-year bonus depreciation allowance which applies to qualified property if
(1) its original use commences with the taxpayer after May 5, 2003; (2) the
asset is acquired by the taxpayer after May 5, 2003 and before 2005 (there can't
be a written binding contract for acquisition in effect before May 6, 2003); and
(3) it is placed in service by the taxpayer before 2005 (before 2006 for certain
property with longer production periods).
We hope this information is helpful. Please keep
in mind that we've described only the highlights of the most important changes
in the new law. If you would like to discuss how these new provisions affect
your personal or business situation, please do not hesitate to contact our
office.
