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| The Tax Prophet Newsletter | Issue #1, May 2003 |
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Pending Tax Legislation |
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| Introduction | |
This week, House and
Senate representatives will meet to finalize "Jobs and Growth" tax bill,
providing between $350 and $550 billion of tax relief to stimulate the economy. Here are
some of the major issues impacting investors and business owners under consideration.
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| Dividends | |
President Bush has
proposed the elimination of taxes on corporate dividends. Currently corporate earnings are
taxed twice: once at the corporate level and again when dividends are distributed to
shareholders. The tax on dividends, it is argued, causes corporations to accumulate
earnings, rather than to distribute dividends to their shareholders. Both House and Senate
have approved limited dividend taxation relief. The House version: 15% tax rate for
dividends (5% for those in the 10% tax bracket) from 2003 through 2012. The Senate
version: An exclusion of 50% of the entire dividend amount in 2003 and 100% in tax years
2004, 2005 and 2006.
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| Reducing Individual Tax Brackets | |
Another Bush
Administration theme is that tax rates are too high and must be reduced. Both the House
and Senate are in general agreement that the tax reductions scheduled for 2006 should be
accelerated to 2003. This will reduce tax brackets by an average of 2 percentage points
(the current 38.6% bracket, however, would drop 3.6% points to 35%) Note: The House bill
lowers capital gains rates from 20% to 15%, but there is no capital gains relief either in
the President's proposal or the Senate's bill, thus passage is doubtful.
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| AMT Relief | |
Despite the outcry from
taxpayers stung by the alternative minimum tax, Congress will not overhaul the AMT system.
Instead, individual exemption amounts will be raised about $7,500 to between $41,750 and
$43,250. For joint filers, the exemption will be raised about $15,000 to between $61,000
and $64,400.
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| Business Incentives | |
Encouraging businesses
to invest in equipment is supposed to stimulate the economy and pull us out of recession.
Both House and Senate will allow faster write-offs on purchases of business equipment. The
House version allows the first $100,000 of equipment to be expensed (written off in the
year of purchase) with the balance eligible for a 50% write-off in the year of purchase.
The Senate bill allows equipment purchase write-offs to increase up to $75,000 for
property placed in service from 2003 through 2007.
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| Repatriated Foreign Earnings | |
Silicon Valley companies
have lobbied for a tax-break if they repatriate their foreign earnings to the US.
Currently, corporations pay 35% tax on their repatriated earnings. The House bill contains
a special one-year tax rate of 5.25%. The policy behind the one-year repatriation break is
to give corporations incentives to repatriate profits and invest them in the U.S. economy
- a one-shot boost in investment.
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| OFFSETS (tax increases) | |
While the House bill
does not contain provisions to pay for tax reductions, the Senate bill contains a host of
offsets to pay for tax breaks.
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| Eliminating the Foreign Earned Income Credit | |
Currently, taxpayers
working overseas at least 330 days during a 12-month period are generally exempt from U.S.
tax on the first $80,000 of earned income. The Senate bill would eliminate this provision,
which could cause sizable pain to corporations staffing their foreign operations with U.S.
taxpayers.
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| Expatriation Tax | |
The Senate would also
impose an immediate tax on those citizens or residents giving up their U.S. citizenship or
residency to save on taxes. Assets will be marked to their fair market value and any gain
will be immediately taxable upon the act of expatriation.
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| Foreign Bank Accounts and Tax Shelters | |
Taxpayers failing to
report income from foreign financial institutions will be subject to a new civil penalty.
Failing to report tax shelter investments and other transactions lacking in economic
substance will be subject to harsher penalties.
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| Miscellaneous Revenue Raising Provisions | |
The Senate would allow
IRS to subcontract some collection activities to private contractors. Corporate CEO's
would have to sign the corporation's tax return. Tax protestors would face a frivolous tax
return penalty increase from $500 to $5,000 and the new penalty would apply to other IRS
functions in which a frivolous (tax protester) position is raised.
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| All contents copyright © 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This 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. |
