2003 Act Lowers Tax Rates, Offers Other Tax Breaks
By Sonya E. King
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (H.R. 2) was signed into law May 28, 2003. The act provides new, lower rates for dividends and capital gains, and lowers income tax rates sooner than previously scheduled under the 2001 tax act.
The act also immediately eliminates the marriage penalty and immediately increases the child tax credit. Individual Alternative Minimum Tax relief is provided under the act as well.
Note, however, that some provisions will “sunset” (expire) at the end of 2009. The provisions providing for lower dividend and capital gain rates will expire at the end of 2008. Nonetheless, planners must work with the law as it exists today while keeping in mind that everything is subject to change.
Income Tax Rates. Current income tax rates (27%, 30%, 35% and 38.6% in 2003) were originally scheduled to be incrementally decreased, in 2004 and 2006, until they finally reached 25%, 28%, 33% and 35% in 2010. The act accelerates the rate reductions and makes the lower rates (25%, 28%, 33%, 35%) effective for tax years beginning after Dec. 31, 2002. These reductions benefit married couples with taxable income greater than $47,450 and single taxpayers with taxable income greater than $28,400. Changes in withholding will start no later than July 1, 2003. Revised withholding tables are currently available on the IRS Web site (www.irs.gov).
10% Tax Bracket. The expansion of the 10% tax bracket will occur in 2003 and 2004 instead of 2008 as originally scheduled under the 2001 act. The endpoint of the 10% tax bracket increases from $12,000 of taxable income to $14,000 for married couples, and from $6,000 to $7,000 of taxable income for single taxpayers. This expansion benefits married taxpayers with taxable income over $12,000 and single taxpayers with taxable income over $6,000. This change is effective for tax years beginning after Dec. 31, 2002.
Dividends and Capital Gains. The maximum tax rates on dividends paid by corporations to individuals and on most long-term capital gains are reduced to 15% in 2003 through 2008 for both regular income tax and AMT purposes. For taxpayers in the 10% and 15% ordinary income tax rate brackets, the tax rate on dividends and capital gains is reduced to 5% in 2003 through 2007, and all the way down to 0% in 2008. Note that collectibles gain and unrecaptured IRC Section 1250 gain continue to be taxed at the 28% and 25% tax rates, respectively. The new rates apply to capital gains realized on or after May 6, 2003, for assets held more than one year. This provision reduces the double taxation of corporate earnings. (Note: The 5-year holding period requirement (under IRC Sections 1(h)(2) and 1(h)(9)) for qualified 5-year gain is repealed.)