A column on personal finance prepared by the Virginia Society of Certified Public Accountants
UNDERSTANDING HOW YOU BENEFIT FROM THE 2003 TAX ACT
(July 18, 2003) - On May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 became the third largest tax- cut package in U.S. history. The Act features income tax rate reductions, investment-related tax breaks, growth incentives for small businesses, and acceleration of certain previously enacted provisions.
According to the Virginia Society of CPAs, to maximize these new tax-savings opportunities, taxpayers should take the time to understand the law and reassess their current investment and tax planning strategies. While almost all taxpayers will benefit in some way from the new law, investors and married couples – especially those with children who qualify for the child tax credit – are likely to gain the most.
Many of the important tax breaks, which are retroactive to January 1 of this year, recede after a few years, and then build back up again. Others are scheduled to completely disappear from the tax code at some future date unless extended by Congress. Here is an overview of the Act’s major provisions to help you determine how it will impact your personal tax situation.
Tax rate cuts are accelerated.
The new law speeds up the tax rate reductions that were being phased in under the 2001 tax act.
Retroactive to the beginning of 2003, the 27 percent bracket falls to 25 percent; the 30 percent rate to 28 percent; and the 35 percent rate to 33 percent, with 35 percent becoming the top income tax rate, down from 38.6 percent. The existing 10 percent and 15 percent tax brackets remain unchanged.
For workers, the boost in take-home pay is automatic. Self-employed workers who pay quarterly estimated taxes should use the lower rates to figure their quarterly tax payments.
Investment income tax rates are sharply reduced.
Under the new Act, for the 2003 through 2008 tax years, dividend income from domestic and qualified foreign corporations is taxed at a maximum rate of 15 percent. Lower-income individuals will pay a tax on their dividends at a new rate of 5 percent. This represents significant tax relief for investors. Last year, dividends from stocks and mutual funds were taxed as high as 38.6 percent.
Another significant change under the Act is the immediate reduction in the net long-term capital gains tax rate from 20 percent to 15 percent on capital gains from the sale of assets held for more than a year. This rate applies to taxpayers in tax brackets above 15 percent. The rate reduction is temporary and will end after 2008.
For lower income taxpayers, the capital gains tax is reduced from 10 percent to 5 percent in 2003 through 2007 and to zero in 2008 (but just for one year; then it jumps back to 10 percent). The new rates are effective for sales on or after May 6, 2003. The 28 percent maximum rate remains in place for long-term gains from the sale of collectibles.
As you consider the impact of these new rules on your investment strategy, keep in mind that the lower capital gains rates don’t apply to dividends received in tax-deferred retirement accounts such as traditional IRAs, 401(k) accounts, SEP, and Keogh accounts. Dividends accumulated in these accounts will still be taxed at the taxpayer’s regular rate when withdrawn as cash distributions.
Child tax credit gets a boost.
The new law raises the child tax credit from $600 to $1,000 for 2003 and 2004 – a $400 hike. This year, the increase will be issued as advance checks sent to eligible taxpayers, beginning July 25. Based on information from 2002 returns, eligible taxpayers will be sent up to $400 for each child for whom a credit was claimed last year, provided the child does not turn 17 before the end of this year. Be aware that there are adjusted gross income thresholds that may preclude some taxpayers from qualifying for this credit.
Marriage penalty relief is accelerated.
Married couples have long complained about paying higher taxes than their single counterparts. The new law doesn’t completely do away with the so-called “marriage penalty” but, for joint filers, it does provide temporary relief in the form of larger standard deduction amounts and an expanded 15-percent bracket.
Specifically, the tax law doubles the standard deduction for married couples to twice the amount of the standard deduction for single taxpayers for 2003 and 2004. The law also expands the 15-percent bracket for joint filers to twice that of single filers. Like the increased standard deduction, this applies only to 2003 and 2004.
AMT relief is available.
For some taxpayers, the downside to lower tax rates is the alternative minimum tax (AMT), a special tax meant to ensure that all taxpayers pay their fair share of taxes. For 2003 and 2004, larger exemptions may prevent the AMT from eating up a portion of a taxpayer’s savings from the new Act. The AMT exemption increases for joint filers to $58,000 (up from $49,000) and for single filers to $40,250 (up from $35,750).
Business owners get tax breaks.
The Act has two measures designed to encourage business spending on new equipment. One is an increase in the amount businesses can “expense” or immediately write off, from $25,000 to $100,000 of the cost in lieu of depreciation. In addition, the threshold at which the expensing amount begins to phase out increases from $200,000 to $400,000 of property put in use in one year. The expensing election now includes off-the-shelf computer software placed in service in 2003, 2004, and 2005.
Businesses can also make use of the additional first-year depreciation deduction, commonly called “bonus depreciation” which increases to 50 percent (up from 30 percent) the amount of first-year depreciation for qualifying equipment purchased on or after May 6, 2003 through the end of 2004.
Making sense of the new tax act.
Many of the mid- and long-term tax planning opportunities afforded by the new Act are complicated by sunset rules. A CPA can help you understand the new Act and determine the best financial strategies for your situation.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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