2003 Tax Alert

The Jobs and Tax Relief Reconciliation Act was signed into law in May, 2003. This Act accelerated many of the tax relief measures in the 2001 Act that were scheduled for 2004 and beyond. This Tax$aver Tax Alert 2003 brochure discusses the major provisions of the new tax laws to help you get the most tax benefit over the coming years. Many of these tax relief measures expire after a short period to comply with Federal Budget Balancing stipulations.

Child Tax Credit Increases to $1,000

The dollar amount of the popular Child Tax Credit increased from $600 to $1,000 for 2003 and 2004. This change accelerates a previous tax provision that had the credit moving to $1,000 in 2005. Advance Payments of up to $400.00 per child were issued in mid to late summer 2003. A typical family with one child would get a check of $400 and a qualifying family with two could see a check of as much as $800.

Who Benefits: The government estimates that as many as 25 million families who received Child Tax Credits on their 2002 return will benefit from this tax change.

Tip: Keep the receipt of this payment for filing 2003 taxes next April. This is true for two reasons:

First, you will receive a check based on last year’s tax filing. If your situation changes in 2003, you may still be eligible for the increased Tax Credit.

Second, you will need to account for the payment when you file your 2003 tax return.

10% Income Tax Brackets

The 10% income tax bracket introduced in 2001 has now been expanded to incorporate more of your income. The 2003 Tax Relief Act makes the endpoint of the income subject to 10% tax for a single person $7,000 (it used to be $6,000). Married couples will see the new 10% bracket apply to up to $14,000 of income (up from $12,000).

Who Benefits: Any single taxpayer with income of more than $6,000 AND any married couple with income over $12,000.

Lower Income Tax Rates

Another major provision of the Tax Act is lowering the income tax rates above the 15% tax bracket. The old and new rates are outlined here:

Since the lower rates apply to all of 2003 income, your employer “over withheld” based on the old rates for the beginning of 2003. Depending on how your employer adjusted withholdings in the second half of the year, you could realize a larger or smaller refund than you did for 2002 In 2004 you may see a different withholding amount by your employer as the new lower withholding requirements will be in effect for the entire tax year.

Tip: Review your W-4 withholdings to make sure the correct amount is being withheld.

Who Benefits: The lower rates benefit Married Couples with taxable incomes over $47,450 and Single Taxpayers with taxable incomes over $28,400.

Less Marriage Penalty

The current Tax Code favors single filing versus filing as a married couple. In other words, two single people filing tax returns with the same income AND same deductions as a married couple would pay a lower tax. This perceived “marriage penalty” has been partially addressed in the 2003 Tax Relief Act in two ways.

1 Standard Deduction
The standard deduction for a married couple is now twice that of a single taxpayer in 2003 and 2004. This accelerates a provision in the 2001 Tax Relief Act that had the change phasing in from 2005-2009.

2 15% Income Tax Bracket
The 15% income tax bracket for married couples is now twice that of a single taxpayer in 2003 and 2004. Prior to this change a married couple would move into the next higher tax bracket sooner than two single taxpayers with the same cumulative income.

Who Benefits: Any married couple who uses the standard deduction or has taxable income greater than $47,450.

Lower Tax Rates On Dividends

The tax rate on dividends has been lowered to a maximum tax rate of 15%. For those in the 10% and 15% taxable income brackets the dividend tax rate is reduced even further to 5%. These lower tax rates on dividends are good for tax years 2003 to 2008. In fact, the 5% rate falls to 0% in 2008. Pre-2003 Tax Act rates return in 2009.

Who Benefits: Approximately 26 million taxpayers who report some form of dividends on their tax returns. This benefit helps seniors who tend to have more dividend bearing investments as a group.

Lower Capital Gains Tax Rate

There is also a reduction in taxes on Long Term Capital Gains to a maximum tax rate of 15% for 2003-2008. This is a reduction of 5%. The new rates only apply to gains realized on or after May 6, 2003. As with dividends, the tax rate falls to 5% if your taxable income is in the 10% and 15% tax brackets.

Who Benefits: Any taxpayer with Long-Term Capital Gains. Any small business owner considering a sale of their business.

Business Benefits

The Tax Act of 2003 also contains key incentives to stimulate small business growth:

• Section 179: Business expense of capital investments increases from $25,000 to $100,000 per year in 2003 through 2005.
  
• First Year Bonus Depreciation: This incentive increases from 30% to 50% for investments acquired and placed in service between 5/6/2003 and 12/31/2004. The prior 30% bonus depreciation may be used for assets placed in service prior to 1/1/2005.
  

Other Changes for 2003
A variety of other significant 2003 changes common to most taxpayer returns are shown in the following table.

On the Horizon In Washington

Charitable Contributions: Congress is debating and favoring new legislation to allow Charitable Contribution deductions to non-itemizing tax filers.

Medicare: Providing prescription drug benefits under Medicare is strongly supported by the President and many in Congress.

IRS Scrutiny: The IRS vows to continue their "crackdown" on Earned Income Tax Credit fraud, off-shore tax scams and to step up audits of self-employed (Schedule C) tax returns.

Retirement Savings: Higher tax favored contributions to IRAs and 401(k)-type accounts may be increased dramatically in the near future.