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2003 Tax Law Changes - Jobs and Growth Tax Relief Reconciliation Act

Signed into law by President Bush on May 28, 2003, The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) provides immediate tax relief to individuals and small businesses. The 2003 Tax Act lowers marginal income tax rates across the board for ALL taxpayers and provides tax breaks intended to promote business investment and personal savings. These tax law changes present numerous tax planning opportunities for individuals and business owners.

The following is a brief highlight of the more significant new tax law changes that may affect your 2003 tax return.

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Individual Marginal Tax Rates

The Jobs and Growth Tax Relief Reconciliation Act of 2003 provides for an acceleration of the individual marginal tax rate reductions as enacted by the 2001 Tax Act that were scheduled to be phased in over tax years 2006 through 2010. The new marginal income tax rates are retroactive to January 1, 2003 and will benefit principally benefit higher income individuals and owners of highly profitable pass-through entities such as partnerships and S corporations. Planning Note: Since the new top marginal tax rate for individuals now equals the top marginal tax rate for regular “C” corporations this may make pass-thru entities such as S corporations and partnerships a more attractive entity choice.

2002 Marginal Tax Rate                                         2003 Marginal Tax Rate
        38.6%                                                                            35%
        35%                                                                                33%
        30%                                                                                28%
        27%                                                                                25%

The 10% and 15% tax brackets remain unchanged however the 10% bracket is expanded for tax years 2003 and 2004.


Alternative Minimum Tax

The Tax Act increases the alternative minimum tax (AMT) exemption by $4,500 to $40,250 for single taxpayers; by $9,000 to $58,000 for married couples filing joint tax returns and surviving spouses and $4,500 to $29,000 for married couples filing separately. The legislation does not increase the point at which the exemption amount begins to phase-out ($112,500 for single taxpayers and $150,000 for married filing joint). The AMT relief only applies to tax years 2003 and 2004 and does not deal effectively with the problem of increasing numbers of middle income tax payers finding that their returns are subject to the AMT.


Long Term Capital Gains Tax Rate Reduced

The 20% long-term capital gains tax rate is reduced by 5% to 15% for capital gains occurring on or after May 6, 2003. For taxpayers in the 15 or 10 percent tax bracket, the rate is reduced to 5%. The reduction in long term capital tax rates is effective until December 31, 2008 when it will return to the 20% / 10% levels. The special tax rate for property held at least 5 years is eliminated effective May 6, 2003.


Tax Rate on Stock Dividends Reduced

Dividends from most domestic U.S. corporations and certain qualified foreign corporations will be taxed at 15% effective January 1, 2003. The reduced tax rates will remain in effect until December 31, 2008. Taxpayers in the 15 and 10 percent tax brackets will pay a 5% tax rate on dividend income. Not all corporate “dividends” qualify for the reduced rates, however, but generally dividends on common or preferred stock on publicly traded securities will benefit from the lower rates. “Dividends” from credit unions, closed end bond funds, etc. do not qualify as dividends since the payment is basically in the nature of interest income.

Child Tax Credit Increased

Prior to the enactment of new tax act, the child tax credit (for qualifying children under the age of 17) in tax years 2003 and 2004 was scheduled to be $600. The new law increases the child tax credit to $1,000. The IRS began mailing rebate checks for up to $400 per child based on your 2002 tax return in the summer of 2003. The credit reverts to $700 for 2005 through 2008. The child tax credit is gradually phased-out for individuals with modified adjusted gross income over $75,000 for single taxpayers and $110,000 for married couples filing joint returns. The length of the phase-out range depends on the number of qualifying children.


Limited Marriage Penalty Relief

For married couples in the 15% tax bracket filing a joint return, the tax act increases the standard deduction for tax years 2003 and 2004 to twice the standard deduction of single taxpayers. For 2003 tax year the standard deduction is increased from $7,950 to $9,500. In tax year 2005 the standard deduction is reduced to 174% on the single taxpayer standard deduction then increases back to twice the single deduction for 2006 and beyond. Higher income, two earner couples and couples who itemize their deductions will generally see no relief from the marriage penalty.


Section 179 Business Property Expensing and Bonus Depreciation

Businesses can now expense up to $100,000 of qualified depreciable property for tax years 2003 through 2005. The deduction phase-out ceiling is also raised from $200,000 to $400,000 of total property purchases during the year. The definition of “qualified depreciable property” under IRC section 179 now includes “off the shelf” software. Taxpayers can take a bonus depreciation deduction (in addition to the regular first year depreciation) in the amount of 50 percent for certain assets acquired on or after May 6, 2003 and before January 1, 2005. The bonus depreciation is not subject to AMT and taxpayers may elect out of the “bonus” if it is not to their tax advantage.

The Act also increased the limit on first year depreciation of luxury automobiles from $4,600 to $9,200 and autos may qualify for bonus depreciation depending on the percentage of business use.

Texas Businesses should note that the bonus depreciation and IRC section 179 expensing election is not available for Texas Franchise Tax Report purposes and will require a separate calculation of depreciation expense.

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