On May 28, 2003, President Bush signed into law legislation providing a total of $330 billion in tax cuts, including temporary reductions in the tax rates on capital gains and dividends and acceleration of marginal rate reductions and other individual tax cuts originally scheduled to take effect in later years under legislation enacted in 2001. The key changes of the new law, known as The Jobs and Growth Tax Relief Reconciliation Act of 2003, are as follows:
Marginal Rate Reductions: Individual income tax rates above 15% will be reduced earlier than previously scheduled, so that effective retroactively to January 1, 2003, these rates are 25% (instead of 27%), 28% (instead of 30%), 33% (instead of 35%) and 35% as the top rate (instead of 38.6%). The lowest bracket of 10% remains, but has been widened a bit so that more income is taxed at this lower bracket rather than the 15% bracket. Now the first $7,000 of taxable income, rather than $6,000, will be taxed at the 10% rate for single persons or married persons filing separately, and the first $14,000, rather than the first $12,000, will be taxed at the 10% rate for married persons filing jointly. The amount of tax savings derived as a result of the rate reductions depends on your filing status and the amount of your taxable income. In the year 2011, the rates will revert to the pre-2001 levels of 15%, 28%, 31%, 36% and 39.6%.
Marriage Penalty Relief: The new law provides relief from the so-called "marriage penalty" (this "penalty" exists when the combined tax liability of a married couple filing a joint return is greater than the sum of the tax liabilities of each individual computed as if they were not married). The relief is provided by way of increasing the standard deduction and widening the 15% bracket earlier than previously scheduled for married couples who file joint returns. For the years 2003 and 2004, the standard deduction for joint filers will be double the standard deduction applicable to unmarried individual returns. For the years 2005 through 2010, the standard deduction for joint filers will be 174%, 184%, 187%, 190%, 200% and 200% of the standard deduction applicable to unmarried individual returns, respectively, as was scheduled under the 2001 law.
Increase in the Child Tax Credit: The child tax credit has been increased earlier than previously scheduled. For 2003 and 2004, the child tax credit will be increased from $600 to $1,000 per qualifying child. The increase in the credit is scheduled to be paid in advance beginning in July of this year. A qualifying family with one child will receive an advance payment check for up to $400, and a qualifying family with two children will receive a check for up to $800. The amount of the advance payments will be based on the taxpayer's 2002 filing status and income, and the number of children claimed on the 2002 return who will still be under age 17 in 2003. However, depending upon the number of qualifying children and filing status, the child tax credit is phased out at certain income levels. For example, for married individuals filing jointly who have one qualifying child, the credit is completely phased out at $130,000 of modified adjusted gross income ($150,000 if they have two qualifying children, $170,000 if they have three qualifying children, and so on); for married individuals filing separately who have one qualifying child, the credit is completely phased out at $75,000 of modified adjusted gross income ($95,000 if they have two qualifying children, $115,000 if they have three qualifying children, and so on); and for unmarried individuals and heads of households who have one qualifying child, the credit is completely phased out at $95,000 of modified adjusted gross income ($115,000 if they have two qualifying children, $135,000 if they have three qualifying children, and so on).
Increase in Alternative Minimum Tax Exemption: The alternative minimum tax, or AMT, is payable if it exceeds your regular taxes. Many tax breaks which are allowed for purposes of calculating regular taxes are not allowed for AMT purposes, which creates the risk that the higher AMT amount will be payable. However, there is an exemption from the AMT, which has been increased under the new law for 2003 and 2004. The new law increases the AMT exemption amount for single taxpayers from $35,750 to $40,250 (a $4,500 increase) and for married joint filers from $49,000 to $58,000 (a $9,000 increase).
Reduction of Rates Applicable to Capital Gains and Dividends: For capital assets sold or exchanged (and installment payments received) on or after May 6, 2003, the new law reduces the maximum tax rate for capital gains from 20% to 15% for the years 2003 to 2008 for taxpayers other than those in the 10% and 15% brackets. For those taxpayers in the 10% and 15% brackets, the maximum rate is reduced from 10% to 5% for the years 2003 to 2007, and 0% for 2008. In addition, beginning retroactively to January 1, 2003, dividends received from a domestic corporation or certain "qualified foreign corporations" are taxed at the same rates that apply to capital gains. The new capital gains and dividend rates apply for both the regular tax and alternative minimum tax purposes.
ncrease in Small Business Expensing: Prior to the new law, small businesses could elect to immediately deduct up to $25,000 of the cost of certain depreciable business assets, and this amount phased out as the cost exceeded $200,000. The new law increases the maximum deduction to $100,000 and increases the phaseout threshold to $400,000 for qualified property placed in service in 2003, 2004 and 2005.
Increase in First-Year Bonus Depreciation: Prior to the new law, in addition to regular annual depreciation deductions, a taxpayer was permitted a first-year bonus depreciation deduction equal to 30% of the adjusted basis of qualified property. The new law increases the first-year deduction to 50% of the adjusted basis for property acquired after May 5, 2003 and before January 1, 2005. Taxpayers may, however, elect to continue to use 30% bonus depreciation.
Note: Similar to the 2001 legislation, the tax breaks in the new law are not permanent and will disappear in the coming years unless Congress acts to make them permanent. It should also be noted that the new law did not make any changes to the federal estate, gift and generation-skipping transfer tax rules.
