Summary of the New Tax Legislation
The 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 (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
THE TOP 10 ESSENTIALS
- Acceleration of Reductions in the Marginal Tax
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.
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
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
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%
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%.
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.
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:
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
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.
- 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:
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.
- 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).
- 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
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.
- 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
- 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.
- 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
- 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.
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.
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