AccountingWEB's
Summary of the New Tax Legislation

The Jobs and Growth Tax Relief
Reconciliation Act of 2003

OVERVIEW

On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), the third largest tax cut in U.S. history.

The new law contains a variety of tax cuts and changes to the tax laws that will affect both individual and business taxpayers. Many of the changes are temporary, lasting only a few years, and will require yet another act of Congress to make them a permanent part of the tax law.

The tax act contains changes to many visible aspects of the tax law including an increase in the Child Tax Credit, a reduction in the tax rates on capital gains and dividends, increases in the maximum amount of depreciation that can be deducted, partial elimination of the "marriage penalty," and a reduction in the marginal income tax rates. Several of these changes are retroactive to January 1, 2003.

New tax withholding tables and a summer rebate program will spearhead the changes to the tax laws, helping to publicize the new features and providing tangible evidence to millions of taxpayers that their tax rates have been reduced.

THE TOP 10 ESSENTIALS

1. Acceleration of Reductions in the Marginal Tax Rates
    
   The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for a reduction in marginal tax rates that were scheduled to phase in over the range of years from 2001 through 2006. The 2003 tax act accelerates that timetable so that the rates that would have been effective in 2006 are now effective in 2003. These new tax rates are retroactive to January 1, 2003 and will be reflected in changed withholding tables that are available now and are to be implemented no later than July 1, 2003.
    
2. Acceleration of the Expansion of the 10% Tax Bracket
    
   In 2001 the 10% tax bracket was created to tax the lowest level of income at a new low income tax rate. For single and married filing separately taxpayers, the first $6,000 of taxable income was to be taxed at 10% instead of the previous rate of 15%. For married filing jointly and surviving spouse taxpayers, the first $12,000 was to be taxed at 10%. It was this new 10% tax bracket that provided an opportunity for the tax rebate that occurred in the summer of 2001. The EGTRRA called for the 10% tax bracket to expand to $7,000 and $14,000 for the respective filing statuses effective in 2008. The new tax act accelerates the expansion amounts to $7,000 and $14,000 in 2003 instead of waiting until 2008.
    
3. Partial Elimination of the Marriage Penalty
    
   Provisions in the EGTRRA in 2001 set in motion the elimination of the marriage penalty by increasing the 15% tax bracket and the standard deduction for married filing jointly taxpayers. These provisions were to begin in 2005 and phase in completely by 2009. The new law calls for the complete elimination of the marriage penalty for tax years 2003 and 2004, after which the 2005-2009 phase-in is to begin as previously scheduled.
    
4. Increase in the Child Tax Credit
    
   A rebate program is scheduled for summer 2003 that will provide approximately 25 million taxpayers with early access to the additional $400 per child credit. The Child Tax Credit previously provided a credit against income taxes of $600 for each dependent child who is under age 17 by December 31 of the tax year. The JGTRRA increases this credit amount to $1,000 per qualifying dependent child. Approximately 25 million taxpayers will receive a rebate check this summer if, based on information in their 2002 income tax return, it appears that they will qualify for the Child Tax Credit for 2003.
    
5. Decrease in the Tax Rate on Long-Term Capital Gains
    
   In recent years, long-term capital gains have been taxed at a maximum rate of 20%. Gains on assets owned for more than five years attracted a lower rate of 18%. These rates were even lower (10% and 8%) for taxpayers in the lowest tax brackets. The JGTRRA lowers the maximum tax rates on long-term capital gains to 15% and 5% and does away with the 18% and 8% rates altogether.
    
6. Decrease in the Tax Rate on Dividend Income to Match the Capital Gain Tax Rate
    
   One of the high-profile debates surrounding this tax law relates to the taxation of dividend income, which has been subject to income tax at both the corporate and individual level. Corporations pay income tax on their income, then the income is passed to shareholders in the form of dividends, and the shareholders pay income tax on the same money, as "ordinary income" taxed at a regular income tax rate. The new law reduces the individual income tax rate on dividend income to a maximum of 15%, and 5% for taxpayers in the lower tax brackets.
    
7. Changes to the Rules for Alternative Minimum Tax
    
   The new tax act increases the amount of income that is exempted from Alternative Minimum Tax (AMT), thus allowing more taxpayers to pay tax at the regular income tax rates instead of the higher minimum tax rates. The changes to the AMT exemptions will be in place only for tax years 2003 and 2004.
    
8. Addition of a New 50% Bonus Depreciation Available
    
   Last year, the Job Creation and Worker Assistance Act of 2002 provided for a bonus depreciation deduction of 30% of the cost of qualified property that was acquired and placed in service after September 10, 2001 and before September 11, 2004. The new act extends the 30% bonus depreciation period to December 31, 2004 and also establishes as an alternative a 50% bonus depreciation deduction for qualified property acquired and placed in service between May 6, 2003 and December 31, 2005.
    
9. Increase to $100,000 the Amount of Section 179 Depreciation Allowable
    
   Section 179 of the Internal Revenue Code provides taxpayers with an opportunity to treat the cost of qualifying property as a deduction rather than a capital expenditure. Prior law allowed taxpayers to take a deduction for up to $25,000 of Section 179 property in 2003. The new tax act allows taxpayers to deduct up to $100,000 of qualifying property. The $100,000 amount will be indexed for inflation in 2004 and 2005.
    
10. Change in the Estimated Tax Requirements for Corporations
     
    Any corporation owing a quarterly estimated income tax payment in September 2003 is entitled to defer 25% of that payment until October 1, 2003. Similarly, the EGTRRA provided for corporations to defer 20% of their September 2004 payment until October 1, 2004.

DETAILS OF THE TOP 10 ISSUES

1. Acceleration of Reductions in the Marginal Tax Rates as Originally Provided by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
    
   The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for a decrease in marginal tax rates over a period of six years. That decrease has been accelerated so that the full amount of the tax rate decrease, originally slated to become effective in 2006, is effective now, retroactively to January 1, 2003. New tax withholding tables are available now and will be mailed to all employers during June 2003. Adjustments to employee withholding are to be implemented as soon as possible, and no later than July 1, 2003. 
    
   The new marginal tax rates are as follows: 
    
   Previous 2003 rate: 10%, no change in New Rate 
   Previous 2003 rate: 15%, no change in New Rate 
   Previous 2003 rate: 27%, New rate: 25% 
   Previous 2003 rate: 30%, New rate: 28% 
   Previous 2003 rate: 35%, New rate: 33% 
   Previous 2003 rate: 38.6%, New rate: 35% 
     
   These rates are scheduled to remain in place until December 31, 2010. On January 1, 2011 the rates are scheduled to increase as follows: 
    
   10% rate increases to 15% 
   15% rate remains the same 
   25% rate increases to 28% 
   28% rate increases to 31% 
   33% rate increases to 36% 
   35% rate increases to 39.6%.
    
2. Acceleration of the Expansion of the 10% Tax Bracket as Originally Provided in the EGTRRA
    
   The new law expands the current 10% tax bracket from the first $6,000 in taxable income for single taxpayers and married taxpayers filing separately to $7,000 in taxable income for 2003 and 2004, retroactive to January 1, 2003. The 10% bracket for married taxpayers filing jointly expands from $12,000 to $14,000 in taxable income for 2003 and 2004, also retroactive to January 1, 2003. The 10% rate for head of household taxpayers on the first $10,000 remains unchanged. The 10% bracket for all taxpayers is scheduled to revert back to 2002 levels ($6,000 and $12,000) for the years 2005-2007, then change to $7,000 and $14,000 again for the years 2008-2010. Sunset provisions in the EGTRRA return taxable income in the 10% bracket to a tax rate of 15% starting in 2011.
    
3. Partial Elimination of the Marriage Penalty by Increasing the 15% Tax Bracket and the Standard Deduction for Married Taxpayers Filing Joint Returns, Effective for 2003 Tax Returns
    
   Prior to the enactment of the JGTRRA, married taxpayers who each earned an income paid a premium in taxes. If the same two taxpayers were single they would benefit from lower marginal tax rates and higher standard deductions on their combined income. The new tax act rectifies this issue for taxpayers in the lower income tax brackets by changing the 15% marginal tax bracket and the standard deduction of married taxpayers filing joint tax returns so that these amounts are exactly double those of single taxpayers, thus eliminating the marriage tax penalty for many taxpayers.
     
   Effective immediately and retroactive to January 1, 2003, the 15% tax bracket for married taxpayers filing joint tax returns is expanded to be exactly double that of individual taxpayers. This change will remain in place for all of 2003 and 2004. Starting in 2005 the phase-in amounts created by the EGTRRA will become effective.
     
   Thus, the 15% tax bracket for married taxpayers filing joint returns will equate to the following percentages of the 15% tax bracket for single taxpayers:
    

   2003 200%

   2004 200%

   2005 180%

   2006 187%

   2007 193%

   2008 200%

   2009 200%

   2010 200%

    
   Starting in 2011 the 15% tax bracket for married taxpayers filing joint tax returns is scheduled to revert to 167% of the single taxpayer's 15% tax bracket, as it was prior to the enactment of the EGTRRA.
    
   In addition, the standard deduction for married taxpayers filing joint tax returns will be double that of single taxpayers for 2003 and 2004. After 2004 the phase-in percentages from the EGTRRA will take over. Thus the standard deduction for married taxpayers filing joint returns will be the following percentages of the standard deduction for single taxpayers:
    

   2003 200%

   2004 200%

   2005 174%

   2006 184%

   2007 187%

   2008 190%

   2009 200%

   2010 200%

    
   Starting in 2011 the standard deduction for married taxpayers filing joint tax returns is scheduled to revert to 167% of the single taxpayer's standard deduction, as it was prior to the enactment of the EGTRRA.
    
4. Immediate Increase in the Child Tax Credit from $600 to $1,000, Effective for 2003 Tax Returns
   
   One of the highest profile features of the new tax legislation is the immediate increase in the Child Tax Credit coupled with a rebate program scheduled for the summer of 2003. Effective for tax years 2003 and 2004 only, the Child Tax Credit, previously scheduled to remain at $600 through those years, is increased to $1,000 for each dependent child under age 17.
    
   In 2005 the Child Tax Credit will return to the phase-in schedule set out in the EGTRRA as follows: 
   
   Child Tax Credit amounts: 
   
   

   2003 $1,000

   2004 $1,000

   2005 $700

   2006 $700

   2007 $700

   2008 $700

   2009 $800

   2010 $1,000

   Starting in 2011 the Child Tax Credit is scheduled to revert to $500 per child.
    
   The JGTRRA calls for an immediate rebate of $400 per child, representing the additional amount of Child Tax Credit due to taxpayers in 2003. The federal government has announced that 25 million taxpayers will qualify for the rebate. The rebate checks are to be mailed as early as July 2003 and no later than October 1, 2003. Eligible taxpayers include those whose qualifying dependents that appeared on 2002 income tax returns will still be under age 17 by December 31, 2003. To be eligible to receive the rebate, taxpayers must have received the benefit of a Child Tax Credit on their 2002 tax return.
    
   The IRS will determine who qualifies for the rebate. No action is required by taxpayers to ensure that they receive their rebates. Eligible taxpayers who meet the criteria for the Child Tax Credit and who do not receive a rebate in 2003 may claim such credit on their 2003 income tax returns.
    

5. Decrease in the Tax Rate on Long-Term Capital Gains to 15% (5% for Taxpayers in the 10% and 15% Tax Brackets)
   
   The income tax on long-term capital gains is reduced from 20% to 15% for transactions on or after May 6, 2003. Long-term capital gain transactions occurring in 2003 but before May 6, 2003 are subject to the rates previously set out in the tax laws. In conjunction with the reduction in the tax on long-term capital gains, the former 18% tax rate is eliminated. 
    
   Long-term capital gains occurring on or after May 6, 2003, that under previous law would have been subject to a 10% maximum tax rate, are to be taxed at 5%. Gains that fall into this category are gains received by taxpayers whose ordinary income is taxed in tax brackets no higher than 15%. 
    
   The new rates for taxation of capital gains are effective for tax years 2003 through 2008. In 2009 the income tax on long-term capital gains reverts to the pre-May 6, 2003 rates of 20% and 10% (18% and 8% on assets held for more than five years).
   
   
6. Decrease in the Tax Rate on Dividend Income to Match the Capital Gain Tax Rate
    
   The income tax on dividends received by individual shareholders is reduced to the same rate as the tax on long-term capital gains. The new, lower rate is effective and retroactive to January 1, 2003. 
    
   Dividends on both common and preferred stock are eligible for the new tax rate. To qualify for the lower tax rate, dividends must be earned on stock that has been owned for at least 60 days of the 120-day period that begins 60 days before the ex-dividend date. Dividends received from stock that does not meet the 60-day rule is subject to ordinary income tax rates. 
    
   Dividends and capital gains earned in tax-deferred retirement funds are still subject to regular income tax rates when the money is withdrawn from the funds. 
    
   While dividends from foreign stock traded on U.S. exchanges qualify for the decreased rate on dividend income, taxpayers should note that any allowable foreign tax credit on such dividend income will be adjusted to reflect the effects of the reduced tax rates. 
    
   The new rates for taxation of dividend income are effective for tax years 2003 through 2008. In 2008, dividends that would be subject to the 5% tax rate will not be taxed at all. In 2009 the income tax on all dividends reverts to the same rates as tax on ordinary income.
    
7. Changes to the Rules for Alternative Minimum Tax That Will Decrease the Number of Taxpayers Who Are Required to Pay This Tax
    
   The exemption amounts that provide the basis for income subject to alternative minimum tax are to be raised effective and retroactive to January 1, 2003. The revised exemption amounts for 2003 and 2004 are as follows: 
    
   • Married taxpayers filing joint return and surviving spouses: $58,000
   • Single taxpayers and heads of household: $40,250
   • Married taxpayers filing separate return: $29,000
   
   Beginning in 2005 the exemption amounts return to their 2002 levels as follows:
    
   • Married taxpayers filing joint return and surviving spouses: $49,000
   • Single taxpayers and heads of household: $35,750
   • Married taxpayers filing separate return: $24,500
   
    
8. Addition of a New 50% Bonus Depreciation Available for Property Acquired After May 5, 2003 and Prior to January 1, 2005
    
   The JGTRRA allows businesses to deduct up to 50% of the cost of certain property in the year of purchase as bonus depreciation. Qualifying property includes property purchased and placed in use after May 5, 2003 and before January 1, 2005. Property for which the purchase was contracted prior to May 6, 2003 does not qualify for the 50% deduction. Property that does not qualify for the 50% bonus depreciation, such as property acquired or placed in service during 2003 but prior to May 6, 2003, is still eligible for the 30% bonus depreciation established by the Job Creation and Worker Assistance Act of 2002. Property acquired between September 11, 2001 and December 31, 2004 is eligible for the 30% bonus depreciation. Previously the cut-off date was September 10, 2004. The new tax act also provides for an increase to $7,650 in the amount of either bonus depreciation or Section 179 expense that may be deducted for luxury automobiles that qualify for the 50% bonus depreciation.
    
9. Increase to $100,000 the Amount of Section 179 Depreciation on Purchases of New Equipment Allowed as a Deduction for Small Businesses
    
   Small businesses are entitled to an increase to $100,000 of the amount of annual deduction allowed for Section 179 property for the years 2003 through 2005. Businesses that place more than $400,000 of qualified property in service in any year are subject to a phase-out of the $100,000 limit. For the years 2004 and 2005 the $100,000 deduction is subject to cost-of-living increases. The $100,000 allowable expense option reverts to $25,000 in 2006. Off-the-shelf computer software is added to the definition of items qualifying as section 179 property. Qualifying computer software is defined as software that is readily available for purchase by the general public, is the subject of a nonexclusive license, and has not been substantially modified. Database software is not included in the definition of qualifying computer software except to the extent that such database software is available in the public domain and is incidental to the operation of the otherwise qualifying software. Taxpayers are allowed to revoke Section 179 expensing decisions made on 2003, 2004, and 2005 tax returns by amending such returns. Any such revocations are final and may not be changed after the return is amended.
    
10. Change in the Requirement for Corporations Owing Estimated Corporate Income Taxes During September 2003
    
    For any corporate estimated tax payments due and payable on a timely basis in September 2003, 25 percent of such payments are automatically extended to October 1, 2003.

SUMMARY

The Jobs and Growth Tax Relief Reconciliation Act of 2003 introduces changes to the tax law that become effective at different dates during 2003 and in years to come. Meanwhile, we are still in the process of phasing in changes from the Economic Growth and Tax Relief Reconciliation Act of 2001 and enjoying changes that were implemented with the Job Creation and Worker Assistance Act of 2002. Some of the changes brought about by these tax acts overlap; others negate each other.

Tax planning opportunities abound as taxpayers try to make sense of the changes from all three tax acts. Does it make sense to change the structure of your investments in light of the new reduced tax rates on capital gains and dividends? How will the increased exemptions for the Alternative Minimum Tax affect taxpayers? What should businesses do to take the best advantage of the changes to depreciation rules? These and more questions are raised as a result of the recent changes to the law.

Make sure you contact your tax advisor to ensure that you are best positioned to take advantage of all of the recent changes to the tax rules.