Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Act)

In a flurry of last minute activity, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Act) before heading out for the Memorial Day weekend and President Bush signed it into law on May 28, 2003. At less than half the tax cut proposed by the President, the 2003 Act still contains tax breaks, which will affect all taxpayers. Once again, Congress has given us temporary tax breaks with varying effective dates and phase-in and phase-out periods.

Here are the highlights of the 2003 Act – changes that are important for every business owner or investor to know. Many of these provisions will impact you, or are already impacting you. They provide incentives for certain acquisitions (such as new business property) and dispositions (due to lower capital gains rates). Let us know which of these topics you would like to discuss further. Summer is the time to start planning to take advantage of these changes.

INDIVIDUAL PROVISIONS

The 2001 Act contained a number of provisions, which were to be phased-in over a span of up to 10 years. The 2003 Act makes some of these benefits effective immediately and accelerates others. Most revert to the 2001 Act phase-in schedule after 2004.

Child Credit: The child credit increases to $1,000 for 2003 and 2004. This is up from the current amount of $600, with the additional $400 being available this summer through a special advance refund. After 2004 this credit will fall back to the $700 level scheduled under the 2001 Act, and then gradually increase again until it reaches $1,000 for 2010.

10% Bracket: The 10% bracket increase scheduled for 2008 now becomes effective for 2003 and 2004. This would mean that an additional $2,000 (increase from $12,000 to $14,000) for married couples and $1,000 (increase from $6,000 to $7,000) for singles would be taxed at the lowest rate of 10%. For 2004, the top bracket amount would be indexed for inflation. After 2004, the taxable income levels for the 10% bracket revert to the levels provided under prior law.

Individual Rate Cuts: The scheduled 2004 - 2006 individual rate reductions are accelerated to 2003. This would reduce rates above 15% retroactive to January 1, 2003. Here's how the rates would change:

2002 Rate 27% 30% 35% 38.6% 2003 Rate 25% 28% 33% 35%

These rates cuts are to be effective for 2003 and thereafter. (This provision does not revert under the 2003 Act, but would still sunset under the 2001 Act provisions.)

Marriage Penalty Relief: The expansion of the 15% bracket and the increase in the standard deduction for married persons filing joint returns is accelerated for 2003 and 2004. For these years, the 15% tax bracket for joint returns will be twice that for single and the standard deduction will also be twice that for singles. After 2004, both of these will revert to the 2001 Act phase-in schedule.

Individual AMT Exemption Amount: The alternative minimum tax exemption amount increases by $9,000 for joint filers and $4,500 for single persons for 2003 and 2004. This brings the AMT exemption amount to $58,000 for married couples and $40,250 for singles for these two years only, after which, the exemptions revert to their prior amounts.

REDUCTION IN TAXES FOR DIVIDENDS AND CAPITAL GAINS

Dividend Tax Rate Reduction: The tax rate on dividends is reduced to 15% for most taxpayers and to 5% (zero in 2008) for those in the lowest tax brackets for dividends received in 2003 though 2008. This applies to dividends from domestic and qualified foreign corporations. This is a significant reduction from the ordinary income rates, of up to 38.6%, at which dividends have been taxed under prior law. Because the tax rate on dividend income was reduced instead of eliminated, there is no requirement in the 2003 Act that corporations keep track of their “Excludable Dividend Amount,” as required by the President’s initial proposal.

Capital Gain Tax Rate Reduction: The tax rate on capital gains is reduced to 15% for most taxpayers and to 5% (zero in 2008) for those in the lowest tax brackets. This is down from the current capital gain tax rates of 20% and 10%. The new lower rates are effective for sales and exchanges (and payments received) between 5/6/03 and 12/31/08 and apply for both regular tax and AMT.

BUSINESS PROVISIONS

Bonus Depreciation: The bonus depreciation ushered in by the 2002 Act will be increased from 30% to 50% for assets purchased between 5/6/03 and 12/31/04. This increases the amount of first year depreciation and extends the time for eligible purchases by several months. Qualified property is defined the same as under the 2002 Act; buildings and used property do not qualify.

Small Business Expensing: For 2003 through 2005, the small business expense allowance (§179 expense) increases from $25,000 to $100,000. The capital purchases amount, which triggers phase-out increases to $400,000 from $200,000 and will be indexed for inflation in years 2004 and 2005. Off-the-shelf computer software will now also qualify for the expensing election.

Example of New Bonus Depreciation and § 179 Expense Rules: If a business buys qualifying 5-year property for $400,000 on May 6, 2003, it will get to deduct $100,000 under §179, take bonus depreciation of 50% of the remaining $300,000 (a deduction of $150,000), and regular depreciation of 20% of the remaining $150,000 (a deduction of $30,000), for total deduction of $280,000 in the first year (70% of the cost).

If the company had bought $500,000 of qualifying 5-year property on May 6, 2003, it would lose the §179 deduction from the phase-out, deduct $250,000 of bonus depreciation and $50,000 of regular deprecation, for a total of $300,000 (60% of the cost). As you can see, the new rules provide tremendous incentives to purchase qualifying business property.

Corporate Estimated Taxes: For corporate estimated taxes due on 9/15/03, 25% can be deferred to 10/1/03. This affects only when the payment is made, not the amount of the payment.

We know that this is a lot to absorb, and it may be just the tip of the iceberg. Congress is indicating that there may be two more tax bills passed before the end of the year. Please call us to learn how the 2003 Tax Act impacts your particular situation.

Sincerely,

Audie W. Alsopp, CPA