After 2004, the provisions enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 will once again become effective.
Child Tax Credit: For 2003 and 2004, the Child Tax Credit increases from $600 to $1,000. The $400 increase will be paid in advance starting in July for those who have filed a 2002 tax return. The advance will be calculated from information on the taxpayer's 2002 tax return. The amount of the 2003 Child Tax Credit that taxpayers can claim in 2003 will be reduced by the advance payment. In 2005, the Child Tax Credit is scheduled to fall back to $700 but will gradually rise to $1,000 by 2010 under the Economic Growth and Tax Relief Reconciliation Act of 2001.
Marriage Penalty Relief for 2003 and 2004: The Standard Deduction for married couples will double to twice the amount of the Standard Deduction for single taxpayers. In 2005, the Standard Deduction for married taxpayers will fall to 174%of the standard for single taxpayers, then gradually rises to double the amount by 2009. For 2003, the Standard Deduction for single taxpayers remains at $4,750. The Standard Deduction for married taxpayers will rise to $9,500. Married taxpayers filing a separate return will claim the same Standard Deduction as a single person. For 2003 and 2004, the 15% tax bracket will be twice that for joint filers, as it is for single filers. After 2004, the 15% tax bracket falls to 180% of the maximum taxable income in the same bracket for unmarried individuals, as adjusted for inflation. Tax Brackets Income levels for the 10% tax bracket are increased to $7,000 for single taxpayers and to $14,000 for joint filers for 2003. In 2004, these income levels will be indexed for inflation. This relief is temporary. The old thresholds of $6,000 and $12,000 will reappear in 2005.
New Tax Rates, retroactive to January 1, 2003 are 10%, 15%, 25%, 28%, 33%, and 35% for individuals.
Capital Gains Rates: The maximum capital gain tax rate drops from 20% to 15%. The current 10% rate for lower income taxpayers drops to 5%. These new rates are effective for sales and exchanges taking place on or after May 6, 2003, and through December 31, 2007. The 15% rate continues in 2008. The lower rates apply for both regular tax and Alternative Minimum Tax purposes. In 2008, the 5% rate for lower income taxpayers drops to 0%, but only for 2008. On January 1, 2009, the 10% and 20% rates are reinstated. The lower rates for property held five years or more is effectively repealed until 2009. These rates were 18% (8% for lower income taxpayers). The 8% rate is repealed effective May 6, 2003. Those taxpayers who would have qualified the 18% rate for sales in 2005-2008 receive no additional benefit other than the lower 15% rate. NOTE: The maximum rate for long-term gains from the sale of some assets, such as collectibles, remains at 28%. Also, unrecaptured Section 1250 gain remains unchanged at the maximum 25%.
Alternative Minimum Tax (AMT) for 2003 and 2004: The AMT exemption amount is increased to $58,000 for married taxpayers and to $40,250 for unmarried taxpayers.
Business Provisions: Section 179 Expensing for 2003: Taxpayers can expense up to $100,000 in qualifying property. The phase-out threshold increases from $200,000 to $400,000. For 2004 and 2005, this amount will be indexed for inflation. The new law allows taxpayers to make or revoke a Section 179 expense election without first obtaining the consent of the IRS. For 2003-2005, taxpayers can expense off-the-shelf computer software under Section 179.
Bonus Depreciation: The additional 30% bonus depreciation increases to 50% for qualifying property placed in service after May 5, 2003, and before January 1, 2005. The definition of qualifying property has not changed. Qualifying property must still be brand new property with a class life of 20 years or less. The new law increases the Bonus Depreciation amount that may be taken with respect to passenger automobiles from $4,600 to $7,650. The 30% bonus depreciation continues to apply to property purchased between September 11, 2001, and May 6, 2003.
Corporate Estimated Tax Payments: The third quarter estimated tax payment for corporate taxpayers that is normally due on September 15, 2003, is not required to be paid until October 1, 2003. Taxation of Dividends Dividends received by an individual shareholder from a domestic or qualified foreign corporation will be taxed in the same manner as capital gain income. This translates to 15% for most taxpayers and 5% for taxpayers at lower income levels. Although this provision is retroactive to January 1, 2003, it is temporary, terminating on December 31, 2008. The 5% rate terminates on December 31, 2007 and falls to 0% for 2008. This one-year break only applies to taxpayers in the 10% and 15% tax brackets.
Certain types of dividends are specifically excluded from the definition of "qualified dividend income" for purposes of the new law. The exclusion applies to:
• Dividends paid from a corporation exempt from tax under IRC Sections 501 and 521.
• Amounts that would be deductible under IRC Section 591 (i.e., dividends paid on deposits in a mutual savings bank, credit union, savings and loan, etc.)
• Any dividend described in IRC Section 404(k).
• Dividends paid under IRC Section 246(c) that fail to meet the revised holding period; or The extent that the taxpayer is under a payment obligations under IRC Section 246(c).
The new tax law also provides additional guidance with regard to dividend income. Dividends are to be treated as investment income (if the taxpayer elects) for purposes of IRC Section 163(d)(4) which limits the amount of the investment interest deduction. What this appears to means is that taxpayers will not be allowed both the benefit of the lower tax rates and the treatment of this dividend income as net investment income for purposes of deducting investment interest. A "qualified foreign corporation" is an entity incorporated within a U.S. possession or is eligible for the benefits of a U.S. tax treaty. Dividends paid by a foreign corporation that are not qualified are eligible for the lower rates if the stock is traded on an established U.S. equities market. National Association of Tax Professionals, May 30, 2003.