The Tax Prophet -Highlights of The Tax Reform Act of 2003 aka The Jobs and Grow Tax Relief Reconciliation Act of 2003

Home > Hot Topics > June 2003

Hot Topics: June, 2003 - part one of a two-part series

Highlights of The Tax Reform Act of 2003 aka The Jobs and Growth Tax Relief Reconciliation Act of 2003

Introduction

President Bush signed into law the Jobs and Growth Tax Relief and Reconciliation Act of 2003, a combination of cuts in the capital gains tax rate, a new 15% tax rate on dividends and a lowering of tax brackets, all designed to stimulate the lagging economy. Here are the highlights:

Capital Gains Cut:

The maximum federal rate for long-term capital gains is 15%, down from 20%. Whether the financially-strapped states will follow suit is doubtful. Unfortunately, there is no relief for those with large capital losses. Taxpayers in the 10% to 15% tax brackets pay capital gains taxes at 5%.

New Dividend Tax Rate:

Corporate dividends will be taxed at 15%. Certain foreign corporations are ineligible for this new tax break. While this provision is designed to encourage corporations to pay their profits to shareholders, rather than retain them, corporate tax planning, especially for small, closely-held companies, has just become a lot more complex. Prior to this change, the tax law was consistent – dividend treatment meant a second tax on earnings. Corporations pay tax on their income, then individuals pay tax when they receive dividends.

Reduction in Tax Brackets

The tax-bracket reduction set for 2006 has been accelerated to 2003. The average is a 2 percentage point drop, although the highest tax bracket dropped from 38.5% to 35% (a 3.6 percentage point change). The change will lower everyone’s regular taxable income and will subject more taxpayer’s to the alternative minimum tax (AMT). The tax bracket reductions are as follows: Regular Income Tax Rates

Old Rate	New Rate
38.6%	35%
35%	33%
30%	28%
27%	25%
15%	Same
10%	Same

Capital Gains Rates

Old Rate	New Rate
20%	15%
10%	5%

Expansion of 10% Bracket

Filing Status	Old Amount	New Amount
Joint Filers	$12,000	$14,000
Single Filer	$ 6,000	$ 7,000

Alternative Minimum Tax

The AMT exemption has been increased from $35,750 to $40,250 for single filers and from $49,000 to $58,000 for joint filers. The exemption is still subject to the same phase-out rules which means that those withl large AMT preference items, such as the exercise of incentive stock options, will likely not benefit from the increased exemptions. The AMT exemption increases apply for tax years 2003 and 2004 only. Planning Note: Those with Incentive Stock Options may want to exercise just enough options to fall below these new exemption amounts. Because the AMT calculation is so complex, use a software tax program or consult with a tax professional to determine the maximum amount of options that may be exercised without triggering the AMT.

Child Tax Credit:

The child tax credit was raised from $600 to $1,000 in 2003 and 2004.

10% Income Tax Bracket

The 10% income tax bracket now applies to the first $7,000 of income for single filers ($14,000 for joint filers). Planning Note: Shifting income to children over age 14 is, once again, a valuable planning tool.

Small Businesses Equipment Expensing

Small businesses may expense up to $100,000 in equipment in the year of purchase, up from $24,000, effective for acquisitions after December 31, 2002. Also, the phase-out for this exemption begins at $400,000 of equipment purchased (up from $200,000). Thus, a small business may invest in $400,000 of equipment and take full advantage of the $100,000 deduction in the year of purchase. In addition, for equipment placed into service between May 5, 2003 and January 1, 2005, taxpayers may claim a 50% bonus depreciation. Note: Vehicles weighing more than 6,000 pounds (i.e. Hummers and other heavy SUVs) qualify as equipment and may be expensed in the year of purchase; however, look for Congress to close this loophole.

Married Taxpayers

Both the 15% tax bracket and the standard deduction are increased to twice the amount allowed for a single taxpayer, thus ending the marriage penalty (a married couple is treated the same as two unmarried individuals). These benefits are reduced after 2004. For tax year 2003, the 15% tax bracket for single filers is $28,400, thus, the 15% bracket would apply to taxable income between $14,000 and $56,800, and the standard deduction would increase to approximately $9,400 (based on the 2002 standard deduction of $4,700 for a single filer).

© 1995-2004 Robert L. Sommers, attorney-at-law, all rights reserved. This article and internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.