Summer Savings with the New Tax Law

President Bush just signed the “Jobs and Growth Tax Relief Reconciliation Act of 2003” into law this May 28, reducing personal income tax rates and providing valuable tax breaks for investors, married couples, families and businesses. How does this affect you and your finances? Well for starters, if you are a parent, you may qualify for a special tax rebate this summer!

With reductions totaling about $350 billion, the Act has something for everyone. Highlights include:

• increased child tax credit
• marriage penalty relief
• accelerated marginal rate cuts
• a reduced capital gains tax rate
• a reduced divided tax rate
• AMT relief
• enhanced small business expensing
• extended bonus depreciation

Let’s take a look at this new tax package, which weighs in as one of the largest tax cuts in history.

Parents Will Get a Bigger Child Tax Credit

For 2003 and 2004, the child tax credit will be increased to $1,000 from $600 per qualifying child. That’s an acceleration of the credit that was scheduled to phase in over several years. Unfortunately, this provision is not permanent, with credit amounts reverting back to prior law in 2005. Unless there’s another change, a $700 credit will apply in 2005-2008, $800 for 2009, and $1,000 in 2010 and thereafter. There’s also a phase-out for high earners, so single filers with adjusted gross income of $75,000 and joint filers of $110,000 don’t get the same benefits.

The good news is that Congress is anxious to get money immediately into the hands of taxpayers to boost the economy. If you’re eligible, you’ll start getting rebate checks this summer. The Treasury Department will issue about 25 million of these child credit rebate checks this year, based on information they have in their computers. Three principal mailings are scheduled for July 25, Aug. 1 and Aug. 8. If you filed after April 15 or if you filed for an automatic extension, you’ll receive your check after the IRS processes your returns.

Remember that this rebate is actually an advance payment of your overall expected refund for your 2003 taxes. So, you shouldn’t make any changes to your 2002 returns or estimated payments based on an expectation of an advance payment check.

The IRS will send notices out on July 23, July 30 and Aug. 6, informing you of your advance payment amount. Make sure you hold on to these notices for your 2003 tax returns. You’ll need to take the advance payment into account when determining the amount of your child tax credit on next year’s return.

If you’re not eligible for the advance payment, you may still qualify for the increased child tax credit of up to $1,000 when you file your 2003 tax return next year. For instance, if you did not have a child in 2002 but had one in 2003 you would not receive an advance payment but may qualify for the full $1,000 credit your 2003 tax return.

Hooray for Married Couples-Finally!

We’ve heard about relief from the “marriage penalty” for years, and finally our lawmakers have delivered. The new tax law immediately doubles the standard deduction for married couples to twice the amount of the standard deduction for single taxpayers.

For 2003 and 2004, the standard deduction for married filing joint (MFJ) tax returns is double the amount for a single filer while the standard deduction for married filing separate (MFS) tax returns will be one-half of the MFJ amount. That means that the MFJ standard deduction will be $9,500 ($4,750 x 2) while the MFS standard deduction will be $4,750 for 2003.

The new law allows the increase of the 10% bracket level to $14,000 for married taxpayers. The 10% bracket level will remain at $10,000 for head of household filers, and will increase to $7,000 for singles. More taxpayers will be able to take advantage of the 10% tax bracket and have a lower tax bite.

Also as part of the new tax law, tax brackets that originally were scheduled to phase in for tax year 2006 will be phased in for 2003. The tax brackets for 2003 now include: 10%, 15%, 25%, 28%, 33%, and 35%. Due to these bracket changes, the IRS has issued new tax withholding tables. These tables are required to be used as soon as possible but no later than July 1, 2003. (That means you can adjust your W-4 immediately for more money in your pocket NOW-so call us and we’ll help you complete a new one.)

However, relief is just temporary-only for two years, 2003 and 2004. In 2005, the standard deduction for married taxpayers will fall to 174% of the standard deduction for single taxpayers and then gradually rise to double the amount by 2009.

Help for Investors: Capital Gains Rates Reduced

Investors have good reason to celebrate: Effective for sales and exchanges (and payments received) after May 5, 2003, and before January 1, 2009, the 10% and 20% rates that apply to adjusted net capital gains are reduced to 5% (zero in 2008) and 15%, respectively. These rates apply for both regular and AMT purposes.

Also, the new law eliminates the 8% and 18% rates for qualified five-year gains (called the “super long-term” rates). Gains realized before May 6 (such as installment sales) will generally be taxed at the then-existing rates, and only new gains will be taxed at the new, lower rates.

Even More Help for Investors: Lower Rates on Dividend Income

You probably remember all the controversy surrounding this proposed change, and finally it’s been put to bed-and investors can dream sweetly. Qualifying dividend income received by an individual will be taxed at a maximum rate of 15% for most taxpayers, while lower income individuals will pay tax on their dividends at a new rate of 5%. This special tax treatment is temporary but also retroactive: The 15% rate is effective for dividends received after 2002. It terminates on December 31, 2008. The 5% rate terminates on December 31, 2007, and falls to zero percent for 2008 only. The old rates return in 2009.

AMT Relief

Originally put into law to ensure that wealthy taxpayers paid their “fair share,” the Alternative Minimum Tax (AMT) began forcing more and more middle-income taxpayers into its territory with inflation. The Act tries to balance this out again by rasing the exemption amounts. The exemption for single taxpayers rises to $40,250 (up from $35,750) and the exemption for married couples rises to $58,000 (up from $49,000), but only for tax years beginning in 2003 and 2004.

Can you say SUV? YES with the Increased Asset Expense Election

One of the more worthwhile items to make it into the law is the huge increase in the amount that businesses can write-off for equipment or other personal property that would otherwise have to be depreciated. The “Section 179” first-year depreciation is increased from $25,000 to $100,000 for property acquired and placed in service in tax years 2003 to 2005.

The limit for all Section 179 property acquired and placed in service during the tax year before the dollar limitation begins to be reduced is increased from $200,000 to $400,000 for taxable years beginning after 2002 but before 2006. Both of these limitations will be indexed for inflation in 2005 and 2005, but are scheduled to return to the $25,000 and $100,000 limits in 2006 and thereafter.

Business owners should also take note that off-the-shelf computer software acquired and placed in service in 2003-2005 is also included as qualifying property. Under current law, off-the-shelf computer software generally is not deemed qualified property.

Bonus Depreciation Boost

Although you may not need it given the new Section 179 deduction limit, bonus depreciation jumps to 50% for property acquired after May 5, 2002, and before January 1, 2005. Property does not qualify for 50 percent bonus depreciation if a binding written sales contract was in effect before May 6, 2003. In addition, the new enhanced bonus depreciation continues to apply on top of regular depreciation (as has been the case with the 30% bonus depreciation).

To conform, the luxury auto depreciation dollar limits are raised where the bonus depreciation amount that may be taken with respect to automobiles increases from $4,600 to $7,650.

We are very excited about the prospective tax savings that will result from these changes and want to make sure that you make the most of them. Please let us help you by contacting us to schedule a mid-year tax check-up TODAY.