Highlights of the New Tax Act

As you probably know, the "Jobs and Growth Tax Relief Reconciliation Act of 2003" was recently enacted and contains significant tax cuts for stockholders, individual taxpayers, couples, and businesses. The act contains numerous phase-ins over the next few years and the provisions are not permanent unless new legislation is enacted in the future. Here's what you need to know about the current year 2003 regarding this important new legislation:

Reductions in tax rates and increase in child credits:
For 2003, the 10% tax bracket is expanded to $14,000 of taxable income for joint filers and $7,000 for single filers. Tax rates above the 15% rate are reduced from 27%, 30%, 35% and 38.6% to 25%, 28%, 33% and 35%. The basic standard deduction amount for joint returns will be double that for single returns and the end point of the 15% tax bracket for joint returns will be double that for single returns, providing some “marriage – penalty” relief.

The child credit is increased from $600 to $1,000 for 2003 for qualifying dependent children under age 17. This credit applies for single and joint taxpayers under $75,000 and $110,000 Adjusted Gross Income respectively. Advance refund checks of up to $400 will be mailed to taxpayers based on 2002 return information filed.

Reductions in taxes on dividends and capital gains:
An important component of the Act, particularly if you are an investor, or have unrealized gains on your real estate holdings, is a reduction in the taxes on dividends and capital gains. These lower rates can mean considerable tax savings for taxpayers, although they are not permanent, since they will cease to apply after 2008, barring additional Congressional action to extend them. Effective for sales and exchanges after May 5, 2003, and before January 1, 2009, the 10% and 20% rates on adjusted net capital gain are reduced to 5% (zero, in 2008) and 15% respectively. The lower rates apply to sales of capital assets, including real estate, held more than one year. Because this 5% drop in the capital gains rate is more than the 3.6% drop in the top individual rate under the Act and the 2% drop in other individual rates, the advantage of long-term capital gains over other types of taxable income is even greater for high earners than it was before.

For dividends received in tax years beginning after 2002 and before 2009, dividends received by an individual shareholder from domestic corporations are treated as adjusted net capital gains. This results in substantial tax savings for dividend recipients given the fact that before the Act, dividend were taxed as ordinary income at rates up to 38.6%.

Business Provisions:
The Act includes temporary tax breaks designed to encourage immediate investments. Small companies can expense up the $100,000 (up from $25,000) in qualified equipment investments through 2005. The limit to which companies qualify for the expense election is increased to $400,000 (up from $200,000). The Act provides for an increase in the bonus first-year depreciation from 30% to 50%. The 50% bonus depreciation applies for qualifying assets placed in service after May 5, 2003 and before 2005.

Corporations filing quarterly income tax estimates get some relief in the timing of their third quarter payment. Calendar year corporations normally pay estimates April 15, June 15, September 15 and December 15. The Act allows that the third quarter estimate by paid by October 1, 2003.

Because many of the tax breaks in the new law are not permanent and are scheduled to phase out in future years, long-range planning is much harder. Consult a professional tax planner to examine the new laws immediate effect on you, your family, your investments and your business and to create a game plan for the future.