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June 11, 2003
(Editor’s Note: Millian Toms, local CPA, sent this letter
out to her clients as a way of explaining the third largest tax cut in US.
history, signed into law last month by President Bush. Her letter is detailed,
thorough and explains a lot. If you have any questions, contact Millian, (248)
541-2052.)
Dear Client and Friend:
For the third time in three years, congress has passed a major
tax cut package, the third largest in U.S. history – The Jobs & Growth Tax
Relief Reconciliation Act of 2003, passed May 23 and signed into law by
President Bush May 28, enacts the following eight major changes;
1 - Reduces the marriage penalty.
2 - Increases the child tax credit.
3 - Expands the 10 percent tax bracket.
4 - Reduces the rates that apply to the three highest tax brackets.
5 - Reduces the maximum tax rate on long-term capital gains and certain
dividend income.
6 - Increases the alternative minimum tax exemption.
7 - Increases the small business expensing limit.
8 - Increases the first-year bonus depreciation percentage.
The good news is that the package does not contain any tax
increases.
There are new withholding tables you must start using no later
than 7/1/03. Go to irs.gov for those tables if you do not receive the new
booklets by then. Those of you who receive payroll checks should see an increase
in net pay.
The amount of the child tax credit is increased to $1,000 in
2003 and 2004 from the current $600. For 2003 the increased amount of the child
tax credit will be paid in advance beginning in July 2003 on the basis of
information on your tax return filed for 2002, as well as the number of children
claimed on your 2002 tax return who will still be under age 17 in 2003. Advanced
payments will be made in a manner much like the $300/$600 refund you received in
2001. When you file your 2003 return, the child tax credit that you can claim
will be reduced by the amount of the advance payment received this year.
Approximately 25 million families will receive checks totaling an estimated $14
billion.
WHAT TO DO WITH THE TAX SAVINGS?
Congress would like to see you spend it to stimulate the economy but you may
want to consider:
1 - Paying down high interest credit card debt.
2 - Establish or supplement an emergency cash reserve fund.
3 - Increase contributions to tax deferred or tax-free accounts such as
traditional or Roth IRA's, 401(k) or 403(b) plans, and section 529 college
savings plans, thereby using the savings to create a deduction that you would
not have had without the tax relief – reducing your taxes further.
Watch your quarterly estimated payments for 2003. You may be
able to reduce them below the scheduled amounts. Be sure and call my office if
you are unsure.
The reduction would start with the estimated payment due 9/15
but could be used earlier if spread out for the entire year.
BUSINESS RELATED SAVINGS:
The amount of investment that may be immediately deducted by small
businesses is increased from $25,000 to $100,000. The amount of investment
qualifying for this immediate deduction begins to phase out for businesses with
investment in excess of $400,000 (increased from $200,000). 80th parameters are
indexed for inflation beginning in 2004. These changes are effective for taxable
years beginning in 2003, 2004, and 2005. Qualified property will include
off-the-shelf computer software. The deduction cannot create a taxable loss. The
portion that exceeds business income must be carried forward to the next year.
The additional first-year bonus depreciation deduction is
increased from 30 percent to 50 percent for investments acquired and placed in
service after May 5, 2003 and before January 1, 2005. Taxpayers may also
continue to use 30 percent bonus depreciation for property acquired and placed
in service before January 1, 2005. Property does not qualify if there was a
bindinq written contract for the acquisition in effect before May 6, 2003. The
new law raises the bonus depreciation that may be taken with respect to
automobiles from $4,600 to $7,650.
BUSINESS PLANNING:
If you accelerate capital purchases into 2003 and 2004 you can take
advantage of the 50 percent bonus depreciation deduction and into 2003-2005 to
take advantage of the $100,000 Section 179 write-off.
IF YOU WANT TO KNOW HOW ITEMS 1, 3, 4, 5 AND 6 WILL SAVE
YOU MONEY, READ ON...
The tax provisions of The Jobs and Growth Tax Relief
Reconciliation Act of 2003:
The expansion of the 10 percent bracket scheduled for 2008 is
accelerated to apply in 2003 and 2004. The endpoint of the 10 percent bracket
increases from $12,000 of taxable income to $14,000 for married couples (and
from $6,000 to $7,000 for single taxpayers). For 2004, these amounts are indexed
for inflation however, beginning in 2005 the endpoint will revert back to the
prior amounts. The 10 percent bracket amount for heads of households remains at
$10,000, but is now subject to inflation adjustments starting in 2004. This
expansion benefits married taxpayers with taxable income over $12,000 and single
taxpayers with taxable income over $6,000.
The reductions in income tax rates in excess of 15 percent
scheduled for 2004 and 2006 are accelerated to 2003, resulting in new rates of
25 percent, 28 percent, 33 percent and 35 percent (from 27 percent, 30 percent,
35 percent and 38.6 percent) through 2010. These reductions benefit married
couples with taxable income greater than $28,400.
The standard deduction for married couples is increased to
double the amount of the standard deduction for single taxpayers in 2003 and
2004 (reduction in marriage penalty). As a result of this change the 2003
standard deduction for married couples will increase from $7,950 to $9,500 and
for married couples who file separately from $3,975 to $4,750. The width of the
15 percent tax bracket for married couples is increased to twice the width for
single taxpayers in 2003 and 2004. These provisions were scheduled to phase-in
over the period between 2005 and 2009. These reductions benefit married couples
who claim the standard deduction or who have taxable income greater than
$47,450.
The maximum tax rate on dividends paid by corporations to
individuals and on individuals' capital gains is reduced to 15 percent in 2003
through 2008. For taxpayers in the 10 percent and 15 percent ordinary income tax
rate brackets, the rate on dividends and capital gains is reduced to 5 percent
in 2003 through 2007, and to zero in 2008. The new rates apply to capital gains
realized on or after May 6, 2003 and before January 1, 2009, and to dividends
received in 2003 and after. The lower rates apply for both regular tax and
alternative minimum tax purposes. This provision reduces the double taxation of
corporate earnings
A key element is the determination of exactly which dividends
will qualify for the lower tax rate and will take some time. A substantial
portion, and in some cases all, of the ordinary dividend income from stock
mutual funds will NOT QUALIFY because short-term capital gains from stock mutual
funds are lumped together with stock dividends. Furthermore, dividends from bond
funds represent interest income, therefore, they too, do not qualify.
To ensure that the benefits from the acceleration of the tax
reductions are not reduced by the alternative minimum tax (AMT), the AMT
exemption amount is increased by $9,000 for married taxpayers and by $4,500 for
single taxpayers in 2003 and 2004. The new exemption amounts become $58,000 and
$40,250. The exemption amount will revert to prior levels in 2005.
ADDITIONAL PLANNING: If you are married filing jointly and
currently claiming the standard deduction you may be able to further reduce your
withholding or estimated payments due to the $1,550 increase in your standard
deduction.
Depending on your marginal tax rate, it may now make sense to
move stocks and stock mutual funds to a taxable account from a tax deferred
account due to the effect of the lower minimum tax rate on dividends and capital
gains.
Your refund check for the child tax credit will not reflect a
child either born or adopted during 2003 because the IRS will be using your 2002
return to figure your refund. Therefore, you may want to lower your income tax
withholding to reflect the additional $1,000 child tax credit. Don't forget,
however, that this credit begins to be phased out for joint filers whose
modified adjusted gross income exceeds $110,000 ($75,000 for single filers).
PLEASE CALL THE OFFICE before taking any actions based on
these changes. You may not receive the expected benefit or obtain the intended
results due to the alternative minimum tax, phase outs of credits and deductions
and the taxable income limitation on the business expensing deduction, just to
mention a few of the complexities that are not fully explained. While every
effort has been made to ensure the accuracy of the information presented, I have
not performed a comprehensive review of the Act and it is merely a summary of
the major changes.
Sincerely,
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