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The Jobs and Growth Tax Relief Reconciliation Act of 2003

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The Jobs and Growth Tax Relief Reconciliation Act of 2003 signed into law by President Bush on May 28, 2003 presents numerous tax planning opportunities for individuals and business owners. The following is a brief overview of the more significant new tax law changes that may affect your 2003 tax return.


Reduction of Individual Marginal Tax Rates

The Jobs and Growth Tax Relief Reconciliation Act of 2003 provides for an acceleration of the individual marginal tax rate reductions as enacted by the 2001 Tax Act that were scheduled to be phased in over tax years 2006 through 2010. The new marginal income tax rates are retroactive to January 1, 2003 and will benefit principally higher income individuals and owners of highly profitable pass-through entities such as partnerships and S corporations.

2002 Marginal Tax Rate                               New Marginal Tax Rate
         38.6%                                                                    35%
         35%                                                                        33%
         30%                                                                        28%
         27%                                                                        25%

The 10% and 15% tax brackets remain unchanged, however the 10% bracket is expanded for tax years 2003 and 2004.


Alternative Minimum Tax Relief for Individuals

The Tax Act increases the alternative minimum tax (AMT) exemption by $4,500 to $40,250 for single taxpayers; by $9,000 to $58,000 for married couples filing joint tax returns and surviving spouses and $4,500 to $29,000 for married couples filing separately. The legislation does not increase the point at which the exemption amount begins to phase-out ($112,500 for single taxpayers and $150,000 for married filing joint). The AMT relief only applies to tax years 2003 and 2004 and does not deal effectively with the problem of increasing numbers of middle income tax payers finding that their returns are subject to the AMT.


Long Term Capital Gains Tax Rate Reduced

The 20% long-term capital gains tax rate is reduced by 5% to 15% for capital gains occurring on or after May 6, 2003. For taxpayers in the 15 or 10 percent tax bracket, the rate is reduced to 5%. The reduction in long term capital tax rates is effective until December 31, 2008 when it will return to the 20% / 10% levels. The special tax rate for property held at least 5 years is eliminated effective May 6, 2003.

2003 Marginal Tax Rate (Sales prior to 5/6/03)       New Long Term Capital Gains Tax Rate*
            20%                                                                                             15%
            18%                                                                                             15%
            10%                                                                                                5%
              8%                                                                                                5%

*Applies to long term capital gains occurring AFTER May 5, 2003. "Long Term" is defined a capital asset that has been held for more than 1 year.
          
 
Tax Rate on Stock Dividends Reduced

Dividends from most domestic U.S. corporations and certain qualified foreign corporations will be taxed at 15% effective January 1, 2003. The reduced tax rates apply for BOTH regular and AMT tax purposes and will remain in effect until December 31, 2008. Taxpayers in the 15 and 10 percent tax brackets will pay a 5% tax rate on dividend income.

2002 Marginal Tax Rate                                New Marginal Tax Rate
            38.6%                                                                 15%
            35%                                                                     15%
            30%                                                                     15%
            27%                                                                     15%
            15%                                                                       5%
            10%                                                                       5%

Not all corporate “dividends” qualify for the reduced rates, however, but generally dividends on common or preferred stock on publicly traded securities will benefit from the lower rates. “Dividends” from credit unions, closed end bond funds, etc do not qualify as dividends since the payment is basically in the nature of interest income. In addition dividends from other corporations exempt from tax under IRC Section 501 such as charitable and religious organizations and IRC Section 521 Farmers Cooperatives also do not qualify for the reduced tax rates. REITs and RICs are subject to special rules.

Taxpayers may opt out of the lower tax rates on dividends and treat the dividend income as investment income for purposes of determining deductible investment interest.

Child Tax Credit

Prior to the enactment of new tax act, the child tax credit (for qualifying children under the age of 17) in tax years 2003 and 2004 was scheduled to be $600. The new law increases the child tax credit to $1,000. The IRS began mailing rebate checks for up to $400 per child based on your 2002 tax return in the summer of 2003. The credit reverts to $700 for 2005 through 2008. The child tax credit is gradually phased-out for individuals with modified adjusted gross income over $75,000 for single taxpayers and $110,000 for married couples filing joint returns. The length of the phase-out range depends on the number of qualifying children.


Limited Marriage Penalty Relief

For married couples in the 15% tax bracket filing a joint return, the tax act increases the standard deduction for tax years 2003 and 2004 to twice the standard deduction of single taxpayers. For 2003 tax year the standard deduction is increased from $7,950 to $9,500. In tax year 2005 the standard deduction is reduced to 174% on the single taxpayer standard deduction then increases back to twice the single deduction for 2006 and beyond. Higher income, two earner couples and couples who itemize their deductions will generally see no relief from the marriage penalty.


Business Property Expensing and Bonus Depreciation

Businesses can now expense up to $100,000 of qualified depreciable property for tax years 2003 through 2005. The deduction phase-out ceiling is also raised from $200,000 to $400,000 of total property purchases during the year. The definition of “qualified depreciable property” under IRC section 179 now includes “off the shelf” software. Taxpayers can take a bonus depreciation deduction (in addition to the regular first year depreciation) in the amount of 50 percent for certain assets acquired on or after May 6, 2003 and before January 1, 2005. The bonus depreciation is not subject to AMT and taxpayers may elect out of the “bonus” if it is not to their tax advantage.

Note: the bonus depreciation and section 179 deduction is not available for Texas Franchise Tax Report purposes and will require a separate calculations of depreciation expense.


Luxury Autos

The limit on first year depreciation of luxury automobiles is increased from $4,600 to $9,200 and may qualify for bonus depreciation depending on the percentage of business use.

Note: Many of the changes in the 2003 Tax Act are of a temporary nature and will revert to the former levels enacted in the 2001 Tax Act. The time limited nature of many of the new tax provisions increases the importance of proper tax planning in order to take full advantage of these changes.

Comparison Based on Filing Status          2003                 2002

Tax Bracket                                                         15%                 15%

Married Joint / Qualifying Widower               14,000              12,000
Married Separate                                              7,000                6,000
Head of Household                                         10,000              10,000
Single                                                                  7,000                6,000

Tax Bracket                                                          25%                 27%

Married Joint / Qualifying Widower                 56,800             46,700
Married Separate                                             28,400             23,350
Head of Household                                           38,050             37,450
Single                                                                 28,400             27,950

Tax Bracket                                                           28%                 30%

Married Joint / Qualifying Widower               114,650             112,850
Married Separate                                              57,325               56,425
Head of Household                                           98,250               96,700
Single                                                                 68,800                67,700

Tax Bracket                                                          33%                     35%

Married Joint / Qualifying Widower              174,700               171,950
Married Separate                                             87,350                 85,975
Head of Household                                        159,100               156,600
Single                                                              143,500               141,250

Tax Bracket                                                         35%                     38.6%

Married Joint / Qualifying Widower             311,950                307,050
Married Separate                                         155,975                 153,525
Head of Household                                       311,950                307,050
Single                                                             311,950                307,050

Personal Exemption Phase-Out Ranges
Adjusted Gross Income (AGI)
Start/End                                                           2003                              2002

Married Joint / Qualifying Widower     209,250 - 331,750       206,000 - 328,500
Married Separate                                  104,625 - 165,875       103,000 - 164,250
Head of Household                               174,400 - 296,900        171,650 - 294,150
Single                                                     139,500 - 262,000        137,300 - 259,800

Alternative Minimum Tax (AMT) Exemption

Married Joint / Qualifying Widower             58,000                       49,000
Married Separate                                          29,000                      24,500
Head of Household                                       40,250                       35,750
Single                                                             40,250                       35,750

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