CONGRESS PASSES THE
THE JOBS AND GROWTH ACT OF 2003
On May 22nd the Conference Committee's proposal for a $350 Billion tax cut bill was approved by Congress. The "Jobs and Growth Tax Act of 2003" is to be sent on to President Bush who has indicated that he will sign the bill even though the compromise worked out between the House and Senate tax committee chairmen was less than half the size of the $726 billion jobs and growth plan sought by the president.
Here are some of the major highlights from the Jobs & Growth Tax Relief Reconciliation Act of 2003:
ACCELERATION OF PREVIOUS TAX REDUCTIONS
Child Tax Credit - increases to $1,000 for calendar years 2003 and 2004. This reverts back to the old law provisions after calendar year 2004, which means the $700 amount will apply in 2005-2008, $800 in 2009, and $1,000 in 2010 & thereafter.
An advance payment will be sent to each taxpayer who claimed the credit on their 2002 tax return for a child who will not reach age 17 by December 31, 2003. This advance payment is to be sent to taxpayers before October 1, 2003, or as soon as possible, with no payments to be made after December 31, 2003. Similar to the last advance payment in 2000 (for 2001), taxpayer's who receive the advance payment will take a lower child tax credit on their 2003 income tax return. This advance payment does have limitations. It is equal to the amount of extra money a taxpayer would have received if the child tax credit would have been $1,000 in 2002 instead of the $600. Therefore the normal limits of tax, additional child tax credit, etc. will apply.
Marriage-penalty relief. The following marriage-penalty relief provisions would apply for 2003 and 2004 only:
The basic standard deduction amount for joint returns is double the basic standard deduction amount for single returns. For tax years beginning after 2004, a joint return filer's basic standard deduction will revert to levels enacted by the 2001 EGTRRA (e.g., for 2005, to 174% of a single return filer's basic standard deduction).
The end point of the 15% tax bracket for joint returns is twice the end point of the 15% tax bracket for single returns.
For tax years beginning after 2004, the end point would revert to the levels enacted by the 2001 EGTRRA (e.g., for 2005, 180% of end point of 15% tax bracket for single returns).
Accelerated increase in 10% rate bracket - This bracket will increase to $14,000 for married filing jointly individuals, stay at $10,000 for head of household taxpayers, and increase to $7,000 for other taxpayers, effective for 2003 & 2004. This will revert back to the $12,000, $10,000, and $6,000 levels in 2005 and continue as under old law.
Reduction of Tax Rates - The tax rates scheduled for 2006 apply for 2003 and thereafter (no reverting later). This means the tax rates for the individuals in the higher income levels are 25%, 28%, 33%, and 35% effective for tax years beginning after December 31, 2002.
Alternative Minimum Tax Relief - The AMT exemption amount for 2003 increases to $58,000 for married filing jointly individuals and $40,250 for single individuals. These are effective for tax years beginning in 2003 and 2004.
Most Sunset Provisions Remain - Unless otherwise stated above, each of these items will still disappear (sunset) at the same time they would have under the Economic Growth Act. In other words, they will all be gone after 2010.
Bonus Depreciation - The 30% bonus depreciation increases to 50% for property:
a) Acquired by the taxpayer after May 5, 2003 and before January 1, 2005, and the there was not a written binding contract in effect before May 6, 2003,
b) The original use is with the taxpayer,
c) The property is placed in service by the taxpayer before January 1, 2005, (property found in §168(k)(2(B) has a January 1, 2006 date), and
d) The taxpayer makes an election to use this 50% instead of the 30%.
The 30% bonus depreciation still exists for those taxpayers that prefer to use it instead of the 50%. Taxpayers may elect on a class-by-class basis to claim 30% instead of 50% bonus first-year depreciation for qualifying property, or elect not to claim bonus first-year depreciation at all.
Automobiles have a first year depreciation/§179 limitation of $7,650 plus the normal limitation if the taxpayer elects the 50% bonus depreciation. (This limitation remains at $4,600 plus the normal limitation if the taxpayer uses the 30% bonus depreciation and at the normal limitation if the taxpayer elects out of the bonus depreciation entirely.)
The 30% bonus depreciation rules are changed by replacing the September 11, 2004 deadline with January 1, 2005.
This provision is effective for tax years ending after May 5, 2003.
Increased §179 Expense Limits - The expensing limit is increased to $100,000 for tax years beginning after 2002 and before 2006. The maximum purchases before the phase-out increases to $400,000 for these same years. These amounts are indexed for inflation in $1,000 increments.
Off-the-shelf computer software is now eligible for the §179 expensing election starting with tax years beginning after December 31, 2002.
The §179 election can now be irrevocably revoked for any tax year beginning after 2002 and before 2006. In other words an election to use §179 can be revoked to not use it, but the taxpayer can not elect back in after making the election and revoking it. Once you are using §179, you can undo it but can't redo it.
There is no sunset provision for this portion.
REDUCTION IN TAXES ON DIVIDENDS AND CAPITAL GAINS
Under current law, an individual's adjusted net capital gain generally is taxed at a maximum rate of 20% (10% if it would otherwise be taxed at 10% or 15%) for regular tax and AMT purposes. Adjusted net capital gain is net capital gain (net long-term capital gains exceeding net short-term capital losses) less 28% rate gain (affecting collectibles and certain small business stock) and less 25% rate gain (generally, gain representing depreciation claimed on MACRS realty). Gain from property held more than five years that would otherwise be taxed at 10% is taxed at 8%, and gain from property held more than five years and the holding period for which begins after 2000, which would otherwise be taxed at 20%, is taxed at 18%.
Dividends received by an individual currently are taxed as ordinary income at rates up to 38.6% (for 2003). Under the new law . . .
Individual Capital Gains Tax Rate Decreases - The 10% rate decreases to 5% (0% in tax years beginning after 2007). The 20% rate decreases to 15%. The tax computation for years that include May 6, 2003 will be similar to the 1997 computation. Gains prior to May 6, 2003 will normally be taxed at the then existing rates and only new gains will be taxed at the new lower rates.
The Alternative Minimum Tax adjustment for the §1202 exclusion decreases from 42% to 7%, effective with dispositions after May 5, 2003.
These rules are effective for taxable years ending after May 5, 2003.
Dividends Tax Rate Decreased - Dividends will be combined with the taxpayer's net capital gain and will be taxed at the rates described above for capital gains. Qualified dividends include those received during the current year from domestic corporations and certain qualified foreign corporations.
There are special provisions and exceptions.
Dividends that are not eligible include:
a) Dividends paid from a corporation that was exemption under §§501 or 521 for the payment year or the preceding year,
b) Dividends described in §404(k),
c) Dividends allowed as a deduction under §591 (dividends paid by mutual savings banks), and
d) §246(C) with some modifications.
There are other restrictions that apply to REITs and RICs. Dividends will not be considered investment income for investment interest expense deductions unless the taxpayer elects to treat them as such (similar to the old capital gains provision).
Sunset Provision: These provisions sunset for tax years beginning after December 31, 2008.
CORPORATE ESTIMATED TAX PAYMENTS FOR 2003
In general, under Code Sec. 6655, corporations must make quarterly estimated tax payments of their income tax liability. For a corporation whose tax year is a calendar year, estimated tax payments must be made by Apr. 15, June 15, Sept. 15, and Dec. 15. Under the conference agreement, notwithstanding Code Sec. 6655, 17% of the amount of any required installment of corporate estimated tax which is otherwise due on September 15, 2003 would instead be due on October 1, 2003.
TEMPORARY STATE FISCAL RELIEF
There is a $20 Billion state aid package in this act, but those sections do not appear to contain income tax affecting provisions.