By Ralph A. Castelli, Jr.
Due to budget constraints, many provisions of the 2003 Tax Act will be diminished or eliminated as time goes on. Tax breaks for individuals are diminished after 2004, and the reduced tax rates for capital gains and dividends only last through the end of 2008. Following are some of the highlights.
Impact Upon Individuals
- Income will be taxed at lower rates. The upper limit of the 10% tax bracket, the lowest bracket, has been increased. Additionally, there has been a reduction in all tax rates above 15%. Income tax rates above 15% for 2003 and later are reduced to 25%, 28%, 33% and 35%. This reduction in the top rates is scheduled to last through 2010. Absent further Congressional action, the rates in 2011 will revert to the levels before passage of the 2001 Economic Growth and Tax Relief Reconciliation Act (i.e., to 28%, 31%, 36% and 39.6%).
- A boost in the standard deduction has been provided for married couples. The basic standard deduction is used by individuals who do not itemize their deductions. The size of this standard deduction varied according to filing status and is adjusted annually for inflation. Under prior law, the standard deduction of unmarried individuals living together exceeded the standard deduction for a married couple filing a joint return. This is the so-called marriage penalty tax that has been referred to in the press. For the years 2003 and 2004 only, the 2003 Tax Act increases the basic standard deduction amount for married joint filers to double that available for single persons.
- For years 2003 and 2004, the child tax credit was increased to $1,000 per eligible child (up from the $600 level under prior law).
- For the years 2003 and 2004, the Alternative Minimum Tax (the "AMT") has been made less problematical due to the increase in the AMT exemption amount by $9,000 for joint filers and by $4,500 for unmarried individuals as well as married individuals filing separately.
Investors
The 2003 Tax Act provides assistance to investors by lowering the maximum tax rate on most long term capital gains. The maximum tax on dividend income was also reduced so that the rate is the same rate that would apply to most long term capital gains. These rate reductions apply for both regular taxes and alternative minimum tax. Some further details are:
- For sales and exchanges after May 5, 2003, and for installment payments received after that date, long term capital gains that were taxed at a maximum rate of 20% under prior law will now be taxed at a maximum rate of 15%. This applies to individuals in the 25% or higher tax bracket.
- Long term capital gains that were previously taxed at a maximum rate of 10% under prior law (8% if the asset was held for more than 5 years) are now taxed at a maximum rate of 5%. This is applicable to those who would otherwise pay tax on the gain at a 15% or 10% rate if it were short term gain. In the year 2008 only, gain in this latter category will be tax free.
- Note that no tax break was provided for short term capital gains (i.e., sales or exchanges of assets held for one year or less). They remain taxable at ordinary income tax rates.
- Gain on the sale or exchange of collectibles and gain recognized on part of the gain on certain business stock continues to face a maximum rate of 28%, and part of the gain on the sale of depreciable real estate will continue to be taxed at 25%.
- Beginning with 2003, dividends paid to non-corporate taxpayers by domestic corporations (and many foreign corporations) will be taxed at a maximum rate of 15%, or at 5% (0% in 2008) for those taxpayers who are in the two lowest tax brackets.
- Since tax simplification was not part of the 2003 Tax Act, it is noteworthy that not all types of dividend income qualify for reduced tax rates. As an example, dividends on stock not held for more than 60 days during the 120 day period beginning 60 days before the ex-dividend rate (90 days within the 180 day period for some preferred stock) cannot take advantage of this new rate. If you can understand that concept, you belong in Congress.
- Absent further Congressional action, the lower tax rates for capital gains and dividends will end in 2008.
Impact Upon Business
Two key provisions were enacted to encourage businesses and professional practices to purchase more machinery and equipment. The goal is to provide stimulus to the economy. Further details are:
- The maximum amount of equipment purchases that a business or practice can expense (i.e., deduct) entirely in the year the assets are placed in service has been quadrupled. The old maximum amount was $25,000. For tax years beginning in 2003 and extending through 2005, the new maximum is $100,000. The maximum annual expensing amount begins to phase out dollar-for-dollar only when the business or practice places in service, during the tax year, expensing eligible property in excess of $400,000 (up from the $200,000 level under prior law).
- For a business or practice that purchases more than the maximum amount of machinery and equipment that can be expensed in the year it is placed in service (or makes purchases that are ineligible for expensing or chooses not to use this methodology), an additional 50% first year bonus depreciation deduction is provided for. This applies to purchases after May 5, 2003 and before 2005.
- Additionally, two special corporate tax rates have been reduced to 15% (from the old rate of 38.6%) effective for tax years beginning after December 31, 2002. These are the accumulated earnings tax and the personal holding company tax. Additionally, the collapsible corporation tax rules have been repealed effective for tax years beginning after December 31, 2002.
For further information regarding these matters, please contact Mr. Castelli at 248.740.5668 or click here to send an email.
|
