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  Jobs and Growth Tax Relief
  Reconciliation Act of 2003

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  May, 2003

On Wednesday, May 28th, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 which should bring at least some tax breaks to almost all of our clients.  As everyone anticipated, the primary beneficiaries of the Act are families with children, stock investors, high income taxpayers and small business. 

 

Individual Tax Rates and Brackets
Marriage Penalty

Child Credit

Alternative Minimum Tax

Dividends

Long-Term Capital Gains

Section 179 Deduction

Bonus Depreciation

 

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.

Individual 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 2003 return.

 

Previous Rate

New Rate Effective January 1, 2003

10 percent 10 percent
15 percent 15 percent
27 percent
25 percent

30 percent

28 percent
35 percent
33 percent
38.6 percent
35 percent

 

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 widened:

 

Filing Status

Current 10% Rate Bracket Amounts

New Income Bracket Effective January 1, 2003

Single $0 - $6,000 $0 - $7,000
Married Filing Separate $0 - $6,000 $0 - $7,000
Married Filing Joint
$0 - $12,000
$0 - $14,000

Head of Household

$0 - $10,000

$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.

Marriage Penalty

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 to 2003.

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" after 2004.

Child Credit

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 single filers.

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 return.  

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.

Alternative Minimum Tax

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 those concerns.

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.

Dividends

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.  

Long-Term Capital Gains

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% rate.

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 source.

The new capital gain rates will expire after 2008 under the sunset provisions.

Section 179 Deduction

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.

Bonus Depreciation

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 after 2004.

Summary

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.

 

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