Inside
the 2003 Tax Package
Are you
single? Married? A parent? An investor? A business owner? Do you receive earned
income or interest income? If you can answer “yes” to any of these
questions, you may benefit from the Jobs and Growth Tax Relief Reconciliation
Act of 2003.1
This tax cut, the third since the Bush administration took office, accelerates
some of the provisions from the 2001 tax package and adds many new ones.
Here’s a rundown of the key features.
Reductions accelerated for top four marginal
income tax rates: The new brackets, which affect single filers
with taxable income greater than $28,400 and married couples with taxable income
greater than $56,800, are 25 percent, 28 percent, 33 percent, and 35 percent.
(Previously, the brackets were 27 percent, 30 percent, 35 percent, 38.6
percent.) Under the 2001 tax law, these reductions weren’t scheduled to take
place until 2006.
The lowest income tax brackets have also changed. The 10 percent bracket
established in 2001 has been expanded. For single filers, the first $7,000 of
income is taxed at the 10 percent rate instead of 15 percent, up from $6,000
under the old law. For married filers, the endpoint of the 10 percent bracket
increases to $14,000 from the former $12,000 limit.
These tax brackets took effect July 1, 2003, but are retroactive to January 1,
so some taxpayers may have already seen an increase in take-home pay due to the
adjusted withholding requirements.
So-called “marriage penalty” temporarily
rectified: Prior to the 2003 tax law, the allowable standard
deduction for married couples filing jointly was less than twice the standard
deduction for single taxpayers. The new law raises the standard deduction to
$9,500, up from $7,950. In addition, the amount of income taxed at 15 percent
has increased from the former $47,450 to $56,800, which is double the amount for
single filers. However, this provision is temporary, and the standard deduction
for married couples will revert to 180 percent of the deduction for singles in
2005 unless Congress acts to extend the measure. If the marriage penalty relief
reverts to the old law, the standard deduction for married couples will not
double the single-filer deduction again until 2009.
Child tax credit increased:
Households with dependent children can claim a $1,000 tax credit for each child
(under age 17) in tax years 2003 and 2004, up from $600. Because this is a tax
credit rather than a deduction against taxable income, the Treasury has been
instructed to mail $400 rebate checks to qualified filers as early as July. As
with the marriage penalty relief, this provision will remain in effect until
2005, when the child tax credit will fall to $700. It will rise gradually to
$1,000 again in 2010 but revert to $500 in 2011 unless Congress acts to extend
or eliminate the expiration date. It’s important to note that the child tax
credit phases out for taxpayers with higher adjusted gross incomes.
Dividend taxes lowered: Any
qualifying corporate dividend income received by individual shareholders after
January 1, 2003, will be taxed at a maximum rate of 15 percent (5 percent for
lower-income taxpayers). This represents a significant tax cut for investors who
were used to paying marginal income tax rates as high as 38.6 percent on
dividend income.
As with other provisions, there are limitations and expiration dates for this
special tax treatment. For example, reduced rates on dividends will remain in
effect only through 2008, after which dividend income will again be taxed as
ordinary income (barring congressional action). Lower-income taxpayers will pay no
taxes on dividend income during 2008.
Only dividend income that meets the definition of “qualified dividend
income” will benefit from the lower tax rate. Income from real estate
investment trusts or from companies structured in a way that helps avoid certain
types of taxes are among the exceptions to qualifying dividend income.
Capital gains taxes lowered: The
maximum tax on gains from investments held longer than one year has been reduced
from 20 percent to 15 percent. Taxpayers in lower brackets will pay only 5
percent, half the former rate. Gains from investments held one year or less are
still taxed as ordinary income.
The 15 percent rate applies to sales and exchanges that take place between May
6, 2003, and December 31, 2008. The 5 percent rate will be reduced to zero
beginning January 1, 2008, — for one year only. Unless further legislation is
passed, the 20 percent maximum capital gains rate will return in 2009.
Deductibility increased for small-business
expensing of new investment: Small businesses can deduct up to
$100,000 annually for the cost of new investment in the business (the old limit
was $25,000). This deduction begins to phase out for businesses that invest more
than $400,000, twice the limit under the old law.
To qualify, the investment must take place in tax years 2003 through 2005. The
deduction limit and the phaseout limit are indexed to inflation beginning in
2004.
First-year bonus depreciation increased:
Fifty percent of the cost of equipment by a small business can be depreciated
during the first year, provided the asset is purchased and placed in service
between May 5, 2003, and January 1, 2005. The former 30 percent first-year bonus
depreciation limit was established by the Job Creation and Worker Assistance Act
of 2002.
Alternative minimum tax exemption increased: The
cuts in the marginal tax brackets will subject more people to the alternative
minimum tax (AMT), which typically can affect taxpayers who make use of a large
number of deductions. The new law raises the exemption amount by $9,000 for
married taxpayers and $4,500 for single filers in 2003 and 2004.
Why Is It Temporary?
It’s no secret that the 2003 tax-relief package was subject to extensive
political debate. It’s typical for the party in power to turn its ideas into
laws, only to have them overturned when someone with different ideas comes to
power. In fact, there have been five major tax laws in the past 10 years. This
indicates that most tax-law provisions will change at some point in the future,
and it’s difficult to predict which provisions will change or when. Even
provisions with expiration dates could be extended. The prevailing political
climate when tax-law expiration dates roll around likely will be the determining
factor.
The lesson here is that because of the short-term nature of the tax-law
provisions, it’s wise to take advantage of them today because there’s no
telling how long they will last. Professional advice may help you spot
opportunities created by new the tax measures that apply to your specific
circumstances.
1) Before you take any specific action be sure to consult with
your tax professional.
©
2002 Emerald Publications
