New Tax Law Provides Multiple Tax Breaks

On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “2003 Act”). This legislation provides individual taxpayers and businesses several new and accelerated tax benefits, starting in 2003. Nearly every taxpayer will benefit under the new law. However, many of the changes are temporary, and careful planning is recommended.

Acceleration of 2001 Tax Law Benefits

The 2003 Act accelerates a number of changes that were scheduled to be phased in over several years under the massive tax cut legislation enacted in 2001.

Individual Rate Reductions.— The 2001 law added a new 10% tax rate to the then-existing 15%, 28%, 31%, 36%, and 39.6% rates and scheduled reductions in the rates above 15% to 25%, 28%, 33%, and 35% in steps through 2006. The 2003 Act accelerates these rate reductions so the lower rates apply in 2003 and later years. Note that, under the 2001 law’s “sunset” provision, the tax rates return to the higher pre-2001 law levels after 2010, unless Congress acts to make them permanent or to change the rates again.

10% Tax Bracket.— Under the 2001 law, the upper ends of the 10% bracket for each filing status (single, head of household, married filing jointly, and married filing separately) were to stay intact until 2008. For 2008, the 10% bracket was scheduled to expand for all but the head of household status. The 2003 Act makes this change for 2003 and, with inflation adjustments, for 2004. After 2004, the taxable income levels for the 10% rate bracket will return to the levels allowed under the 2001 law.

Marriage Penalty Relief.— The 2001 law called for relief from the “marriage penalty,” to be introduced in steps starting in 2005. (The “marriage penalty” exists when the combined taxes of a married couple filing jointly are greater than the sum of their tax liabilities computed as though they were two unmarried filers.) The 2003 Act accelerates the full measure of this relief to 2003 and 2004. It does this by increasing the basic standard deduction for joint filers to twice that of single filers and by increasing the size of the 15% bracket for joint filers to twice the size of the 15% bracket for single filers. After 2004, the standard deduction and 15% brackets revert to what they would have been under the 2001 law’s phase-in provisions.

Child Tax Credit.— The child tax credit for qualifying dependent children under age 17 is increased by the 2003 Act from $600 to $1,000 for 2003 and 2004. The credit will be $700 in 2005-2008, $800 in 2009, and $1,000 in 2010, following the 2001 law’s original schedule. Note that the government will begin sending advanced payments of the increase in the credit for 2003 (up to $400 per eligible child) in July. Many taxpayers who qualified for the child tax credit on a 2002 federal tax return (the credit phases out for higher income taxpayers) will receive a check this summer.

AMT Exemption.— The 2001 law increased the alternative minimum tax exemption amounts for individuals through 2004. The 2003 Act increases those exemption amounts even more for 2003 and 2004. For joint filers, the exemption increases from $49,000 to $58,000; for single filers and heads of households, from $35,750 to $40,250; and for married persons filing separately, from $24,500 to $29,000. After 2004, the exemption amounts return to pre-2001 law levels.

Capital Gains and Dividends

One of the stated goals of the administration was to reduce or eliminate the “double tax” on corporate dividends. The 2003 Act does this one better by reducing taxes on both dividends and long-term capital gains (gains on capital assets, like investments, held more than one year).

Capital Gains Taxes.— The long-term capital gains tax rate is reduced from 20% to 15% for most taxpayers, and from 10% to 5% for gains that otherwise would be taxed in the 10% or 15% bracket if they were ordinary income. The 5% rate goes to zero percent for 2008 only. The new rates are effective for sales, exchanges, and payments received on or after May 6, 2003, and before January 1, 2009.

Taxes on Dividends.— Dividends are taxed at the same 15%/5% rates as capital gains, including the zero percent rate for 2008. The new dividend rates are effective for tax years after 2002 and before 2009. Qualifying dividends are those paid by domestic and qualified foreign corporations, including private corporations. A specific holding-period requirement for dividend-paying stock and several other special rules apply.

Business Incentives

The 2003 Act also contains growth incentives for businesses.

Enhancement of Bonus First-year Depreciation.— A 2002 law allows businesses to claim an additional first-year depreciation “bonus” equal to 30% of the adjusted basis (essentially, the cost) of qualified property. The 2003 Act expands and modifies the bonus depreciation provision. Under the new law, taxpayers can elect additional first-year depreciation of 50% for qualified property. The original use of the property must begin with the taxpayer after May 5, 2003, and the property must be acquired by the taxpayer after May 5, 2003, and before January 1, 2005, and be placed in service before that latter date. Several additional requirements and exceptions apply.

Increase in Section 179 Expensing.— Smaller businesses may elect under Section 179 of the tax code to expense the cost of depreciable assets in the year acquired, rather than taking depreciation deductions over time, within tax law limits.

Prior law allowed a business to write off up to $25,000 of the cost of qualifying property placed in service during the tax year. That amount was phased out dollar-for-dollar as the taxpayer’s cost of qualifying property exceeded $200,000 for the year. The 2003 Act increases the dollar amount that can be expensed to $100,000 and increases the annual investment amount at which the expensing limit begins phasing out to $400,000.

The new amounts are effective for tax years starting in 2003 through 2005 (as adjusted for inflation for 2004 and 2005). After that, the limits revert to the pre-2003 Act limits.

Call on Us

The 2003 Act provides new tax-saving opportunities for individuals and businesses, many available for a limited time. This is only a brief summary of the new law; the rules governing many of these new benefits are very complex and professional tax assistance is highly recommended. Our tax professionals are ready to help you make the most of the new tax breaks. Contact us today.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.