Jobs and Growth Tax Relief Reconciliation Act of 2003
On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003. Although the new legislation calls for an immediate impact on individuals and investors, many of the provisions within the new law are only temporary.
Income Tax Considerations
Marriage Penalty Relief: For tax years beginning in 2003 and 2004, the 15% regular income tax bracket for married couples filing a joint return has been expanded to twice the size of a single taxpayer’s 15% tax bracket, mostly eliminating the “marriage penalty”. The “penalty” exists whenever the tax on a couple’s joint return is more than the combined taxes each would pay if the couple were not married and filed his or her own single or head of household return. For tax years after 2004, the 15% tax bracket is reduced in size, and then gradually increases until it again equals twice the single filer’s amount for year 2008 and thereafter.
The new law also calls for an adjustment to the standard deduction. 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 deduction for single taxpayers, and then gradually rise to double the amount by 2009.
Child tax credit: For the 2003 and 2004 tax years, the child tax credit has increased from $600 to $1,000 per child. The $400 increased amount was paid in advance this summer, beginning in mid-July.
The advance payments were based on the child tax credit claimed on the 2002 tax return. Taxpayers should have received an advance notice from the IRS explaining how the amount was computed.
Note: For those taxpayers who qualified for the child tax credit but did not receive a check this summer, the full amount may be claimed on the 2003 tax return.
In 2005, the child tax credit is scheduled to fall back to $700, but will gradually increase to $1,000 by 2010.
Capital gains: The maximum tax rate for capital gains drops from 20% to 15%. In addition, the current 10% rate for lower income taxpayers drops to 5%. The new rates apply to sales and exchanges of assets held more than one year, with respect to sales after May 5, 2003 until December 31, 2007.
Dividends: Qualified dividends, received in tax years beginning after 2002 and before 2009, will be taxed in the same manner as capital gains. In other words, the dividends are taxed at rates of 5% (zero, in 2008) and 15%.
Certain types of dividends are specifically excluded from the definition of “qualified dividend income” for purposes of the new law. The reduced rate does not apply, for example, to mutual fund “dividends” that are in the nature of interest, many types of preferred stock dividends, dividends paid on employer securities held by an employee stock ownership plan (ESOP), and dividends on stock owned for less than 60 days.
Note: These new capital gain and dividend rates apply for both regular and alternative minimum tax.
Increased expensing limits for businesses and corporations
§179 Expensing: Effective for tax years beginning in 2003 through 2005, the maximum annual expensing amount is $100,000. Under the prior law, the annual limit was $25,000. The election permits a business to expense (that is, deduct immediately rather than depreciate over several years) a certain amount of the cost of depreciable property purchased and placed in service during the tax year.
Property eligible to be expensed now includes off-the-shelf software placed in service in a tax year beginning in 2003 through 2005. Under prior law, software was ineligible for expensing.
In effect, the increased expensing limitations mean that most small businesses will be able to claim a full deduction for the cost of their business machinery and equipment. Additionally, the ability to currently deduct the entire cost of qualifying property makes purchasing (as opposed to leasing) a more attractive option than it was under prior law.
Bonus Depreciation: In an effort to stimulate the economy, the new law also allows businesses to elect a 50% (increased from 30%) bonus first-year depreciation allowance for qualifying property.
The definition of “qualifying property” has not changed under the new law. However, for property to qualify for the 50% bonus depreciation, it must be new property in the hands of the taxpayer purchased after May 5, 2003.
With respect to passenger automobiles, the new law increases the firstyear depreciation deduction that may be taken from $4,600 to $7,650.
Note: The bonus depreciation adjustment is not an alternative minimum tax adjustment.
HH bonds to be discontinued
This year, the US Government quietly announced to the public that HH bonds would be discontinued in mid-2004. After the elimination of the opportunity to obtain new HH bonds, investors will no longer have the ability to defer paying federal taxes on the interest accrued on EE/E/H bonds for an additional 20 years (or until they cash in the HH bonds or re-issue them). Previously issued HH bonds are not affected by the change and will be valid until final maturity.
Tax-free distributions from your Roth-IRA
For those individuals who made Roth-IRA contributions in 1998 (the first year for which contributions were allowed), distributions may now be taken tax-free. A withdrawal from a Roth-IRA is tax-free if made:
(1) after the five-year period that begins with the first tax year for which the taxpayer makes a contribution to a Roth-IRA, and
(2) on or after the taxpayer’s attainment of age 59-1/2, disability, death, or for qualified first home purchases.
For example, an individual who made a Roth-IRA contribution in 1998, and is now age 59-1/2 or older, can take a distribution, including the earnings, tax-free.
Combat zone compensation exclusion
Military-pay exclusion: As a reminder, in recognition of their service to America, all servicemen and women are provided: an exclusion from income for the military pay they earn while in a combat zone, and automatic extensions of time for filing a return and paying tax. This tax relief applies to military and support personnel serving in combat zones such as the Arabian Peninsula.
This “combat zone compensation” exclusion applies to compensation received by the member for active service for any month during any part of which the member served in a qualified hazardous duty area, was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone, or was hospitalized as a result of injuries sustained while serving in a qualified hazardous duty area.
Outside combat zone: U.S. Armed Forces personnel serving outside the combat zone are entitled to the military pay exclusion only if they are serving in direct support of military operations in the combat zone for which they receive hostile fire/imminent danger pay.
Teachers may get a deduction for 2003 classroom supplies
The IRS is advising teachers to save their receipts for purchases of books and classroom supplies. Such out-of-pocket expenses could lower their taxes. The deduction is available for eligible educators in both public and private schools.
To be eligible a person must work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide.
Up to $250 in qualified expenses may be deducted, even if the educator does not itemize deductions. In the past, such expenses were only deductible as miscellaneous itemized deductions and subject to the limitations on such deductions.
Deductions for weight loss programs
Under new rules issued by the IRS, it is now easier to deduct the cost of weight-loss programs. A weight loss program is considered a deductible medical expense only if you participate in the program as a treatment for a specific disease diagnosed by a physician. If you enroll in the program to improve your general health, rather than to alleviate a specific ailment, the costs are not deductible. Therefore, it’s a good idea to get a written diagnosis from your doctor before starting the program. But remember, medical expenses are only available as itemized deducations, and they must exceed a substantial minimum figure (7½% of adjusted gross income).
Year-end tax planning tips
Individuals may want to postpone income until 2004 and accelerate deductions into 2003 to lower their tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2003 that are phased out over varying levels of adjusted gross income. These could effect Roth-IRA contributions, conversions of traditional IRAs to Roth-IRAs, child credits, higher educations tax credits, and deductions for student loan interest.
For those who are fortunate enough to be expecting a bonus, it may be beneficial to arrange for the employer to defer the bonus (and the tax liability for it) until 2004.
Bunching deductions: Some taxpayers, who file Schedule A, Form 1040, may do well to “double itemize”. Essentially, the individuals can prepay their deductible expenditures to generate almost twice the amount of itemized deductions every other year. For the following tax year (when the taxpayer has virtually no itemized deductions) the taxpayer is allowed to use the standard deduction.
Note: Taxpayers who are subject to the alternative minimum tax (AMT) may not find “double itemizing” helpful because state income taxes and real estate taxes are deductible for regular income tax purposes, but not for AMT purposes.
Take advantage of a loss: With the recent bear market, many investors who have realized a loss in their portfolio may actually benefit from a recognized loss for tax purposes. Losses will offset gains, and thereafter up to $3,000 of loss may be used to offset ordinary income. (The Wisconsin limitation is $500 of “excess loss”.)
Note: To avoid the “wash sale” rules you cannot buy substantially identical stock inside of the period that begins 30 days before and ends 30 days after the sale of the loss stock.
Catch-up election: Individuals who are 50 or older can make a “catchup” contribution to an IRA or Roth IRA in the amount of $500. Thus, for a taxpayer who has reached age 50 by the end of the year, the combined limit on deductible contributions to an IRA is $3,500. This applies to each spouse separately.
Deductible IRA contributions: You can make an annual deductible contribution to an IRA if you (and your spouse) are not an active participant in an employer-sponsored retirement plan, or you (or your spouse) are an active participant in an employer plan and your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.
Spousal IRA: An IRA contribution is allowed only if the taxpayer has compensation. However, a “Spousal IRA” is the exception to that rule. Even if the working spouse is covered by an employer-provided retirement plan a non-working spouse can still make a fully deductible IRA contribution so long as their joint AGI, as specially computed doesn’t exceed $150,000.
von Briesen & Roper Legal Update is a periodic publication of von Briesen & Roper, s.c. It is intended for general information purposes for the community and highlights recent changes and developments in the legal area. This publication does not constitute legal advice, and the reader should consult legal counsel to determine how this information applies to any specific situation.