By Paul N. Gada, CCH Financial Planning Toolkit Staff Writer
In the tax world, three now appears to be a magic number. For the third time in three years, taxpayers are fortunate to receive the benefits of another tax-cut package, designated as the third largest in U.S. history. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), enacted May 28, 2003, provides $350 billion of relief, with approximately $320 billion labeled as tax cuts, $20 billion allocated for aid to the states in 2003 and 2004 ($10 billion for Medicaid assistance and the rest for other essential government services), and the remainder allocated to $400 per child tax credit refunds that are expected to be sent to taxpayers as early as July of 2003.
Putting aside political debate and economic theorizing, there are at least 350 billion reasons to love our latest tax acronym. Under JGTRRA, most individual taxpayers will see a significant reduction in their taxes due to tax changes that become effective as early as the beginning of 2003. In addition to these reductions, small business owners also get substantial incentives to purchase assets for their businesses.
Individual Tax Breaks
As far as tax laws go, the individual tax breaks under JGTRRA are fairly straightforward. One of the most notable of the new tax law changes is a reduction in the top four marginal income tax rates. The rate reductions actually accelerate changes that were to take effect in 2006 under the Economic Growth and Tax Relief Act of 2001 (EGTRRA).
Beginning in 2003 and effective through 2010, the previous tax bracket rates of 27, 30, 35, and 38.6 percent are lowered to 25, 28, 33, and 35 percent, respectively. At the same time, individuals' alternative minimum tax (AMT) exemption amounts are increased so that the benefits from the accelerated reduction in individuals' regular income tax rates are not diminished by the AMT.
As for the lowest two tax brackets, the 10 percent bracket is temporarily expanded for 2003 and 2004. In these years, the income cut-off will increase from $6,000 to $7,000 for single filers and from $12,000 to $14,000 for married persons filing jointly. Afterward, the tax rate thresholds drop back to $6,000 for single filers and $12,000 for joint filers in 2005 through 2007. In 2008 through 2010, the amounts will again go back up to $7,000 for single filers and $14,000 for joint filers.
For 2003 and 2004, the 15 percent tax bracket for joint returns is increased to exactly twice that for single taxpayers. This addresses part of the filing inequities that are affectionately known as the marriage penalty. On a related note, married taxpayers filing jointly in 2003 and 2004 will also get more marriage penalty relief by having their basic standard deduction increased to exactly twice that allowed for single taxpayers.
Another high profile JGTRRA provision that will help put money back in taxpayers' pockets involves an increase of the child tax credit from $600 to $1,000 per child for 2003 and 2004. Taxpayers whose 2002 returns indicate they are entitled to the credit for 2003 will receive advance payment of the $400 increase in the credit for 2003 in the form of rebate checks (just like the ones received in 2002). The child tax credit falls to $700 in 2005 through 2008; rises to $800 in 2009; and returns to $1,000 for 2010.
The new tax changes also reduce capital gain and dividend tax rates to 15 percent for the four highest tax brackets and 5 percent for the two lower brackets. The 15 percent rate extends through 2008, while the 5-percent rate continues through 2007 and drops to zero in 2008.
Business Tax Breaks
The reduction in marginal interest rates under JGTRRA mentioned above will also help 23 million small businesses that pay taxes at the individual rate. However, the biggest business related tax breaks revolve around a four-fold increase in the small business expensing election limit and an increase in the allowable bonus depreciation percentage, both intended as growth incentives for businesses.
Increased small business expensing -- As a result of JGTRRA, the amount that a small business can deduct under the Code Sec. 179 expensing election for depreciable property placed in service from 2003 through 2005 is increased from $25,000 to $100,000, and the capital purchase amount for qualifying property is increased from $200,000 to $400,000. During the same time period, small businesses are now also allowed to expense off-the-shelf computer software. In addition, taxpayers can make or revoke expensing elections on amended returns without prior IRS consent.
The small business expensing election is a continuing hot topic for small business owners. For example, the National Federation of Independent Business (NFIB), the nation's largest small business lobbyist group, asked its 600,000 members to name their biggest tax problems. Among the top 10 tax problems cited by its members was the low Code Sec. 179 expensing limits. The NFIB found that the old business expensing limit was exceeded by the average company in only three months. The four-fold increase in expensing limits under JGTRRA should, therefore, address these complaints.
Taxpayers should also keep in mind that the $400,000 phase-out threshold will return to the previous $200,000 threshold in 2006 without the enactment of new legislation. In addition, the $100,000 maximum amount that can be deducted for qualifying property will revert to $25,000 in 2006 without the enactment of new legislation
Increased bonus depreciation -- A JGTRRA provision increases the additional first-year depreciation allowance percentage enacted by the Job Creation and Worker Assistance Act of 2002 (JCWAA) from 30 percent to 50 percent. To qualify for the higher percentage, the property must be acquired after May 5, 2003, and generally placed in service before January 1, 2005. The 50 percent rate does not apply if a binding written contract for acquisition of the property was in effect before May 6, 2003.
The first-year bonus depreciation cap on a new vehicle subject to the luxury tax is increased to $7,650 if the 50 percent bonus election is made ($4,600 for the 30 percent bonus election). In the case of a new electric vehicle, the $7,650 figure is tripled to $22,950.
The increased 50 percent rate does not apply to bonus depreciation that is claimed on qualified New York Liberty Zone property. The 30 percent rate continues to apply to New York Liberty Zone property even if it is acquired after May 5, 2003.
Taxpayers may elect to continue to use the 30 percent rate. For example, if you expect to be in a higher tax bracket in future years, you may want to use the 30 percent rate rather than the 50 percent rate or elect out of bonus depreciation entirely.
Be careful coordinating and combining the new bonus depreciation changes with the new expensing election limits. As previously mentioned, the higher expensing election limit applies for all of 2003, while the 50 percent bonus depreciation kicks in for purchases made only after May 5, 2003. Although not a change under JGTRRA, also remember that used property does not qualify for bonus depreciation at either the 30-percent or 50-percent rate, while it does qualify for the expensing election. Given these complexities, you should consult with a tax professional both before and after making substantial asset purchases.
Lighter (and Not-So-Lighter) Side of Legislation
In an ironic twist that should make any tax professional chuckle, there is a "sense of the Senate" provision in JGTRRA calling for the overhaul of the Internal Revenue Code (IRC) and its "myriad deductions, credits and schedules, and over 17,000 pages of rules and regulations." Although it was mentioned that the IRC's 6.9 billion words far exceed those of the bible (a mere 1,773,000 words), there was no mention whether the IRC's word count did or did not include the myriad deductions, credits and schedules created as a result of our newest round of tax law changes.
If you haven't figured this out by now, our tax laws are getting more and more complicated every year. Through the end of 2010, the number of the temporary tax rate and other changes, with their various phase-in/phase-out dates, make mid- and long-range tax planning a nightmare for the uninformed.
Unless you are confident you know what you are doing, strongly consider seeking the help of a tax professional in the years to come. Just remember that the saying about a fool and his money also applies where tax money is concerned.
- Related items:
- Congress Passes $350 Billion Tax Cut Bill
- Retirement Planning in a Down Market
- Who Really Pays Income Taxes?
- States Face Growing Budget Gaps, Half Eyeing Tax Increases
Added to the news archive on June 3, 2003.
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