2003 TAX ACT

With the passing of the 2003 Tax Act last month, there are new advantages for the taxpayer beginning this year. There are several areas where the individual and corporate taxpayer will see these tax advantages:  accelerated tax cut rates for individual taxpayers, marriage penalty relief, increased child tax credit, dividends and capital gains tax reductions, and tax incentives for growing businesses.

TAX BRACKETS The following table compares the tax bracket changes under the new 2003 Tax Act to the old law under the 2001 Tax Act.  The rates will return to pre 2001 rates after 2010.

MARRIAGE PENALTY RELIEF A marriage filing penalty occurs when a married couple filing jointly has a tax liability greater than if they filed as single individual taxpayers.  There are two changes in the 2003 Tax Act to help relieve this marriage penalty.  For 2003 and 2004, the standard deduction (for those who do not itemize) and the size of the 15% tax bracket for married filing joint will be double that of the standard deduction for single filers.  The following table summarizes the changes for the years 2003-2010.  Again, the rates will return to pre-2001 tax rates after 2010.

CHILD TAX CREDIT For those taxpayers who have dependent children under the age of 17, a child tax credit can be claimed.  The phaseout ranges for modified adjusted gross income begin for single filers at $75,000, for married filing jointly at $110,000, and for married filing separate at $55,000.  Under the 2001 Tax Act, the child tax credit for 2003 and 2004 was $600 per child.  Now under the 2003 Tax Act, the child tax credit for 2003 and 2004 is $1,000 per child.  After 2004 the credit will revert back to the old law—$700 for 2005-2008, $800 for 2009, and $1,000 for 2010.  For those taxpayers that claimed the child tax credit on their 2002 return, will receive an advance payment of $400 per child beginning in July 2003.

ALTERNATIVE MINIMUM TAX RELIEF  As part of the 2003 Tax Act, AMT exemption amounts have been increased as follows:

·          Married filing jointly—from $49,000 to $58,000.

·          Head of household & single filings—from $35,750 to $40,250.

·          Married filing separate—from $24,500 to $29,000.

After 2004, the exemption amounts return to pre-2001 law levels.

DIVIDENDS & CAPITAL GAINS For many years experts have found it unfair that corporate dividends are taxed twice –first when profits were reported on corporate tax returns and then when paid out to shareholders as dividends.  Under the 2001 Tax Act, capital gains rates were reduced to 20% and 10% for those in the 15% tax bracket.  Under the new 2003 Tax Act, dividends from domestic or “qualified foreign” corporations will be taxed at the capital gains rates, which will be reduced in 2003-2007 to 15% and 5% and then in 2008 to 15% and 0%.   To qualify for the reduced rates, the holding period is more than one year.  After 2008, the capital gains rates will return to the old law, which is 18% and 8% and dividends will be taxed as they were before the 2003 Tax Act.

BUSINESS INCENTIVES

EXTEND OF FIRST YEAR DEPRECIATION In 2002, taxpayers received a first year bonus of 30% of the adjusted basis of qualified property using MACRS.  In 2003, that first bonus has been raised to 50%.  This applies to new property acquired after May 5, 2003 and before January 1, 2005.

INCREASE IN SECTION 179 EXPENSING Under the old law, property purchased can be expensed up to $25,000 and phaseout begins dollar for dollar for total property purchased over $200,000.  Under the new law, this has been increased to $100,000 that can be expensed and the phaseout range beginning at $400,000.  This is effective for 2003—2005, adjusted for inflation in 2004 and 2005.

CORPORATE ESTIMATED TAXES Corporations that are required to make estimated tax payments have to do so by April 15, June 15, September 15, and December 15.  In order to fit the cost of the 2003 Tax Act into the $350 billion framework, Congress has made estimated tax payments payable by September 15, 2003 to be made payable by October 1, 2003.