As of May 28, 2003, President Bush passed into law, the “Jobs and Growth Tax Relief Reconciliation Act of 2003”. I am not quite sure what this law is supposed to reconcile, but we will just have to wait and see what the economic impact will be.


Reduced Federal Income Tax Rates
Here is some really good news. Rates were scheduled to be reduced in 2006 and were accelerated to be effective as of January 1, 2003. You may have already paid in too much money for this year. Every taxpayer needs to recalculate their anticipated tax due using the new lower rates and compare that with what has already been paid in either through withholding or estimated tax payments. Here are the rate changes:

Current 2003 Rates
10, 15, 27, 30, 35, 38.6%

New Rates Retroactive to 1/1/03
10, 15, 25, 28, 33, 35%

As you can see, those in the upper rate categories, above 35%, have received the biggest cut in rates. Those in the lower brackets also are getting an additional benefit because the lowest bracket threshold, 10%, has been raised for all taxpayers. Withholding tables are to be immediately adjusted for the new rates, but on a go-forward basis only.

Reduced Capital Gains Rates
Now that there is some life put back in the stock market, those gains you may be looking at can be harvested with a lot less impact on your pocketbook. Under the new law, the maximum net capital gains tax rate falls five percentage points from 20% to 15%. The current 10% capital gains rate for lower-income taxpayers falls to 5%. The new rates are effective for transactions closed on or after May 6, 2003. These rates apply for regular tax and AMT (alternative minimum tax). In 2008, the 5% rate will drop to zero, but just for one year. On January 1, 2009 these new lower rates will disappear and the rates are scheduled to go back to the 20 and 10% rates. Keep in mind that short-term gains are still going to be taxed at regular, ordinary income rates and you now can get even more benefit by holding on longer to create long-term gains.

Next year, when you are preparing your returns, be sure to report gains after May 6th separately so that you get the full advantage of the lower rates. There will be major changes made to the schedule D on the income tax returns to accommodate these partial-year rate changes.

Reduction of Tax Rates on Dividend Income
Under the new provisions, dividends received by an individual shareholder from domestic and qualified foreign corporations generally are taxed at the same rates that apply to capital gains. This applies to both regular and alternative minimum tax. This means that you will be paying either 15% at the upper income levels or 5% for those of you in the lower income levels. The 5% rate drops to zero in 2008. This rate reduction is also retroactive to January 1 so you get the full benefit for this year. There are certain types of dividends that will not qualify for the lower rates, so either ask your broker if all the companies you hold qualify, or if you own the stocks directly, contact the company directly to see if their dividends fall under the lower rate provisions. For example, “dividends” from a REIT do not qualify for the new, lower rates, because the amounts paid out are not considered dividends for tax purposes.

Acceleration of the Marriage Penalty Relief
For you couples out there, here is finally some relief from the hit you take when you tie the knot. Some of you may have experienced the painful realization that once the two of you file a joint return you have an increased tax liability without any increase in income. That increased tax liability is what is called the “Marriage Penalty”. The relief being offered by Congress is only temporary, covering 2003 and 2004 only. There are two changes being made to help married couples with this increased tax. The first break offered is the increased standard deduction for married couples, raised from $7,950 to $9,500, twice that of single filers. The second break is the expansion of the 15% tax bracket for joint filers to twice the bracket of single filers. After 2004 the 15% bracket for joint filers will fall to 180% of the maximum taxable income in the same bracket as unmarried individuals, adjusted for inflation.

AMT Relief
Although in dire need of a complete overhaul, the alternative minimum tax calculation did end up with some adjustment. The exemption from alternative minimum tax has been raised for 2003 and 2004 only. For singles the exemption amount has been increased to $40,250 and for married couples, to $58,000. This is some relief but not the reform that the alternative tax system needs.

Increased Section 179
Immediately, business taxpayers will be able to elect to deduct, under section 179, up to $100,000 per year of qualified property. For 2004 and 2005 the amount will be indexed for inflation. You also have the ability to make or revoke this election on amended returns without prior IRS consent. After 2005, the law reverts back to pre-2003 law.

Bonus Depreciation
Effective May 5, 2003 first-year bonus depreciation increased to 50%. In 2005 the first-year amount will fall back to 30%. The 50% first year bonus depreciation can be used in conjunction with the section 179 of $100,000. You can 179 the first $100,000 and then depreciated one-half of the balance remaining during the first year. You have the option to opt out of this first-year bonus.

To conform the luxury auto depreciation dollar limits to include enhanced bonus depreciation, the new law raises the bonus depreciation amount that may be taken on automobiles in the first year from $4,600 to $7,650.

Corporate Estimated Tax Postponement
The due date of the third quarter corporate estimated tax payment has been pushed back to October 1, 2003, giving corporations an extra 15 days to pay.

Child Tax Credit
The law immediately increases the child tax credit from its current $600 to $1,000. This new rate is effective for 2003 and 2004. In 2005 the credit falls back to $700, then climbs back to $1,000 by 2010. Starting in July the government is sending $400 checks to eligible taxpayers. Benefit of the credit is phased out for couples with adjusted gross income of $110,000 or more and at $75,000 for singles.

As you can see, there appears to be something for everyone, and hopefully you will come out a winner under these new tax provisions.

Gloria D. Birnkrant, CPA, CSA
(310) 288-4239
gdb@nsbn.com.