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1
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2
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- A. The child tax credit was increased for the current year from
$600 to $1,000, with the increased amount to be paid in advance,
beginning in July. The advance payment will only be sent to those
who filed tax returns last year showing a qualifying child, but if the
credit is not received in advance, it can be claimed as a credit on the
2003 return. The advance payment is intended to inject cash into
the economy as a stimulus as well as to provide help for families.
- B. The credit will be built into withholding tables for 2004
- C. After 2004, prior law applies, reducing the credit to $700, with
phased increases in future years, back to $1,000 in 2010, then back to
$500 for 2011, so timing is everything! The fluctuations seem
arbitrary to taxpayers, but are based on budgetary constraints for the
tax reductions.
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3
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- A. The standard deduction for married taxpayers filing joint
returns is twice that of the standard deduction for single individuals
for 2003 and 2004. Beginning in 2005, prior law is scheduled to
return, which starts at 174 percent of the standard deduction for
individuals, ramps up to twice the standard deduction again in 2010, and
then the relief is eliminated in 2011 for budgetary constraints imposed
when the 2001 Tax Act originally enacted this relief.
- B. The size of the 15% regular income tax rate bracket for
married couples filing joint returns is increased to twice the size of
the 15% bracket for single individuals for 2003 and 2004 in an
acceleration of prior enacted rate relief for married couples.
Beginning in 2005, prior law is scheduled to return, which starts at 1.8
times the size of the 15% bracket for single individuals, ramps up to
twice the size again, and then is eliminated in 2011 for budgetary
reasons.
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4
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- A. This is the third tax reduction since 2001, including The
Economic Growth and Tax Relief Reconciliation Act of 2001 with 10 years
of rate cuts for individuals and the Job Creation and Worker Assistance
Act of 2002 which give specific tax benefits for businesses. The
new Act accelerates some of the previously enacted rate cuts.
- B. For 2003, the income levels for the 10% regular income tax rate
rise from $6,000 to $7,000 for single individuals and from $12,000 to
$14,000 for married filing jointly. For 2004, the ceiling for this
rate bracket is indexed, and for 2005, it is scheduled to revert back to
$6,000 and $12,000, increasing again in 2008 to $7,000 and $14,000 and
then indexed for inflation.
- C. Other rates are reduced as well, from 38.6% to 35%; from 35% to
33%; from 30% to 28%; and from 27% to 25%. Generally, while these
rate reductions, coupled with the broadening of the 10% bracket, will
reduce the tax burden nicely, they are not dramatic enough to trigger
any tax planning of shifting income or deductions.
- D. The rate reductions are retroactive to January 1, 2003, and
withholding tables will be adjusted for the remainder of the year to
increase paychecks and provide a cash stimulus to the economy.
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5
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- A. The individual alternative minimum tax exemption amount
increases from $49,000 to $58,000 for married taxpayers filing joint
returns and surviving spouses and from $35,750 to $40,250 for unmarried
taxpayers for 2003 and 2004.
- B. The increased exemption amount should reduce the number of
taxpayers with AMT liability, with other reductions in this bill
generally applying to regular and alternative minimum tax, including the
child credit, capital gains, and dividends (see below).
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6
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- A. For property that would qualify for the 30% additional
first-year depreciation under the Job Creation and Workers Assistance
Act of 2002 the first year bonus depreciation rate is increased to 50%
of the adjusted basis. (The 50% is in lieu of 30%, not in addition
to it.)
- B. This generally applies to property acquired after May 5, 2003
and placed in service before January 1, 2005 (January 1, 2006 for
long-term production property).
- C. For "luxury automobiles", the limit on first year
depreciation is increased from $4,600 to $9,200 (an amount that is not
indexed), but bonus depreciation is not available where the auto is not
used more than 50% for business purposes.
- D. To provide an incentive for further investments and to prevent a
mere windfall for previously agreed purchases, property will not qualify
if there was a binding written contract for acquisition before May 6,
2003.
- E. The basis of the property for further depreciation will be
reduced by the bonus depreciation amount.
- F. Bonus depreciation is deductible for both regular and
alternative minimum tax.
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7
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- A. The maximum amount that can be expensed under Section 179 is
increased to $100,000 for property placed in service in 2003, 2004, and
2005. This amount will be indexed for inflation after 2003.
- B. The amount of property placed in service before Section 179
begins to phase out is increased from $200,000 to $400,000.
- C. The election to expense may be revoked by the taxpayer on an
amended return, without permission from the Commissioner. However,
once revoked, the taxpayer cannot change back again.
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8
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- A. The new Act provides enhancements in recovering capital costs,
and depending on the amounts involved, taxpayers could use more than one
of the benefits.
- B. Generally, the taxpayer would first take the Section 179
deduction, then bonus depreciation on the remaining cost, and finally
regular depreciation on any remaining cost.
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9
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- A. The 20 percent rate on net capital gains is reduced to 15
percent. For those in the 10 and 15 percent rate brackets, the
capital gain rate is reduced to 5 percent now and to zero in 2008.
- B. This applies to sales and exchanges after May 5, 2003, and
before January 1, 2009.
- C. The lower capital gain rate is used for computing both regular
tax and alternative minimum tax.
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10
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- A. For individual taxpayers, the Act provides that dividends will
be taxed at the same rate as capital gains, thus 15 percent for most
taxpayers, and 5 percent for those in the 10 and 15 percent rate
brackets, with the lower income brackets enjoying tax-free dividends in
2008.
- B. The reduced rates apply for tax years 2003 through 2008.
(The dividend rate applies to dividends received beginning on January 1,
2003.
- C. The reduced rates apply for regular and alternative minimum tax
purposes.
- D. Dividends from domestic corporations and qualified foreign
corporations qualify for this favorable treatment. Qualified
foreign corporations are those incorporated in a U.S. possession and
those eligible for benefits of a comprehensive income tax treaty with
the U.S. and having an adequate exchange of information program with the
U.S. The foreign corporation's stock must also be readily tradable
on U.S. securities markets, and must not be a foreign personal holding
company, a foreign investment company, or a passive foreign investment
company.
- E. There are special rules with respect to extraordinary dividends
and dividends from RICs or REITs.
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11
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- A. For the corporate estimated tax payment that is due on September
15, 2003, 25% of the payment amount is not due until October 1, 2003.
- B. This is another example of budgetary constraints on taxes, with
no other purpose than to shift a specific portion of the payment into
the next Federal government fiscal year.
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12
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- A. Bonus tax depreciation and direct expensing will be expensive
for states that conform to the Federal tax law in taxing asset cost
recovery, but if they do not conform, their taxpayers will face
significant complexity. Some states have already enacted
conformity and others that are still in session could do so. Some
who have completed their session could come back in special session to
enact conformity. On the other side, although the Act contains $20
billion in direct state aid, some states may choose not to conform, even
to the point of calling a special legislative session to decouple and
avoid the lost revenue for their tight state budgets.
- B. The differences between Federal and state rules will require
separate records and calculations for the life of the property acquired.
- C. For multi-state corporations, the variety of methods of
accounting for cost recovery could be an accounting and tax compliance
nightmare.
- D. The AICPA Tax Division will post information on state law
conformity prior to the filing season.
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13
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Notes
