As it has in the past, Congress performed a
little "sleight of hand" in order to get the cost of the
reductions under the Senate's imposed $350 billion maximum. Each of
the Act's provisions are subject to "sunset rules" which means
that they will expire in the near future and without further Congressional
action, rates will go back to their previous levels.
If Congress does extend the new rates indefinitely, many analysts are
estimating that the cost of the bill could go as high as $800 billion over
the next 10 years instead of the projected $350 billion.
Tax Rates and Brackets
The 2003 Act has widened the 10% tax
bracket and accelerated the individual rate cuts that were established in
the 2001 Tax Relief Act to January 1, 2003. The chart below
illustrates the new tax rates that were originally proposed to become
effective in 2004 and 2006. Business owners should be receiving
revised payroll tax withholding tables for the second half of this year
which will reflect the new rates.
What about payroll withholding already
collected at the now-too-high rates? In most cases, it
means you gave Uncle Sam a bit too much for the first half
of the year. This could produce a bit bigger refund (or
smaller tax bill if you expect to owe) when you file your
Rate Effective January 1, 2003
As you can see, the current 10% and 15%
rates remain unchanged and without future action by Congress, these rates
will revert back to 15%, 28%, 31%, 36%, and 39.6% after 2010 and the 10%
rate will disappear completely. The 10% rate bracket has also been
10% Rate Bracket Amounts
Effective January 1, 2003
$0 - $6,000
$0 - $7,000
$0 - $6,000
$0 - $7,000
Married Filing Joint
$0 - $12,000
$0 - $14,000
$0 - $10,000
The increased brackets mean that more of
your income ($1,000 for single filers and $2,000 for joint) will be taxed
at the lower 10% rate. As you can see, the head of household bracket
did not increase. The new brackets are scheduled to end after 2004.
The so called "marriage penalty"
that has been built into our current tax rates for many years has taken a
huge step toward being resolved. Congress initially came up with a
plan to resolve the marriage tax penalty problem in 2001, but it wasn't
going to take effect until 2005. This Act accelerated that provision
It hasn't totally been eliminated, but at
least it has been addressed at the 15% bracket level and the standard
deduction. Basically, the marriage penalty results from the fact
that when two people get married, their standard deduction and income tax
bracket level doesn't double from what it was when they were single.
Effective for the current year however, the
15% bracket for joint filers is now exactly twice as wide as the 15%
bracket for single filers. That 15% bracket now tops out at taxable
income of $56,800 (up from $47,450). The standard deduction for
joint filers is now $9,500 which is exactly double the amount for single
filers. If you are married filing separate, your 15% bracket amount
and standard deduction amount are the same as if you were filing
single. The marriage penalty relief will also "sunset"
The child credit for dependent children
under age 17 is increased to $1,000 from $600. The credit also
applies to dependent stepchildren, grandchildren and foster
children. The adjusted gross income phase-out however, remains
unchanged. The credit is gradually phased out for taxpayers with
adjusted gross income exceeding $110,000 for joint filers and $75,000 for
As of this writing, it is anticipated that
up to 25 million taxpayers will receive child credit rebate checks of $400
per dependent child sometime in July or August based on information from
their 2002 tax returns and assuming their child doesn't turn 17 before the
end of this year. That means also that if your child was born this
year, you will not receive the rebate check. You will, however be
able to claim the additional $400 credit when you file your 2003
You are also not likely to receive the
rebate check if your 2002 return was extended and has not yet been
filed. The additional child credit is only applicable for 2003 and
2004 unless extended by Congress. Presently, the credit is scheduled
to drop to $700 in 2005.
In addition to the marriage penalty, the
alternative minimum tax (AMT) has also drawn strong criticism over the
last few years. It was originally designed to target high income
taxpayers who were able to escape taxes through excessive deductions and
loopholes. Now, however more and more middle-income taxpayers are
getting hit by its provisions and the 2003 Act at least addresses some of
For 2003 and 2004, the AMT exemption for
joint filers is increased from $49,000 up to $58,000. The exemption
for single filers increases from $35,750 to $40,250 and the exemption for
married filing separate filers increases from $24,500 to $29,000.
The exemption amounts were increased in order to prevent the AMT from
swallowing all of your gains as a result of the new Act. Without
further congressional action however, the AMT exemptions for 2005 will
drop to $45,000 for joint filers, $33,750 for single filers and $22,500
for married filing separate taxpayers.
In order to reduce the impact of
double-taxation on corporate earnings, the maximum rate on qualified
dividends has been dropped to 15%. Previously, dividends were
considered ordinary income and were taxed at the same rates as wages and
interest. From 2003 through 2008, qualified dividends from domestic
corporations and qualified foreign corporations will be taxed at the same
low rates as long-term capital gains. If you are in the 10% or 15%
rate bracket, your dividends will only be taxed at 5%. (For 2008,
the rate will be 0%, but just for that one year.)
What do we mean by "qualified"
dividends? In order to be eligible for the reduced rates on
qualified dividend income, you must hold the stock on which the dividends
are paid for more than 60 days during the 120-day period that begins 60
days before the ex-dividend date (the last date on which shareholders of
record are entitled to receive the upcoming dividend). In other words,
when you own shares only for a short time around the ex-dividend date,
your dividend income will be taxed at your regular rate.
Unfortunately for most of us, these lower
dividend rates do not apply to dividends received in tax-deferred
retirement accounts such as traditional IRAs, 401(k) accounts and SEP and
Keogh accounts. Dividends received in those accounts are not taxed
until withdrawn as cash distributions and they will remain taxable as
ordinary income when received.
With some exceptions, long-term capital
gains generated from sales made on or after May 6, 2003 will be taxed at a
maximum of 15% (down from 20%) and only 5% if you are in the 10% or 15%
income bracket. (Unless changed, the rate is 0% in 2008 for the
lower income brackets, but that only applies to that one year).
Long-term capital gains from the sale of
collectibles and certain small-business stock is still taxed at the 28%
maximum rate. Long-term gains from the sale of real estate
attributable to depreciation deductions claimed against the property (referred
to as unrecaptured Section 1250 gains) is still subject to the maximum 25%
The old capital gain rates (20% maximum for
high income brackets, 10% maximum rate for those in the 10% or 15%
brackets and 8% maximum rate for five-year gains earned by taxpayers in
the 10% or 15% brackets) will still be applicable on sales made prior to
May 6, 2003. Again, just as we pointed out above with the new
dividend rates, the lower capital gain rates will not apply to investments
held in tax-deferred retirement accounts. When distributed, those
accumulated earnings will all be taxed as ordinary income regardless of
The new capital gain rates will expire
after 2008 under the sunset provisions.
The 2003 Act brings a huge windfall for
capital intensive small businesses. The Section 179 first year
depreciation allowance has been increased from $25,000 to $100,000!
Under Section 179, businesses can instantly deduct 100% of the cost of
most new and used business assets acquisitions (other than real estate) up
to $100,000. Computer software is also now eligible for Section
179. Under the sunset provisions, the Section 179 rate will revert
back to $25,000 in 2006 without further congressional action.
For qualifying new assets acquired and
placed in service between May 6, 2003 and December 31, 2004, additional
first year depreciation can be taken for up to 50% of the cost. This
provision increases the 30% bonus depreciation that was introduced in the
2002 Act. Assets acquired before May 6, 2003 are still eligible for
the 30% first year bonus depreciation.
Also, for new (not used) autos placed in
service on or after May 6, 2003, the maximum first year depreciation
deduction will increase to $10,710. For new autos placed in service
prior to May 6, 2003, the maximum first year deduction will remain at
$7,660 (under the old 30% bonus depreciation rule). It is important
to remember that both the 30% and 50% bonus depreciation rules apply only
to "new" assets. If you purchase a used vehicle anytime
during 2003, you will still be subject to the maximum depreciation of
$3,060 in the first year.
All of the bonus depreciation rules expire
The Jobs and Growth Tax Relief
Reconciliation Act of 2003 will quite likely have sweeping implications
for tax and investment strategy. If you have any questions on the
provisions outlined above, please feel free to contact our office.
Over the next few months, we will have further articles in our newsletter
concerning potential strategies you can take to obtain maximum benefit
from the new rates now in effect.