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.)
A new 15% tax rate applies to “qualified dividend income,” which means dividends received from domestic corporations and qualified foreign corporations. Certain dividends are excluded from qualified dividend income, including: (1) dividends paid by tax-exempt corporations; and (2) dividends paid on certain employer securities (as described in IRC Section 404(k)).
Amounts taken into account by an individual as investment income under IRC Section 163(d)(4)(B) do not count as qualified dividend income. “Dividends” paid by a mutual fund may count as “qualified dividend income” if the income being passed from the fund to the investors is qualified dividend income in the hands of the fund, and not short-term capital gain or interest from bonds. REIT dividends generally do not qualify for the 15% tax rate.
Marriage Penalty. In 2003 and 2004, the standard deduction for married couples will be increased so that it is double the amount of the standard deduction for single taxpayers. The width of the 15% tax bracket for married couples will also be increased to twice the width for single taxpayers in 2003 and 2004. These provisions were originally scheduled to be phased in between 2005 and 2009. These reductions benefit married couples who claim the standard deduction or who have taxable income greater than $47,450. Both changes apply for tax years beginning after Dec. 31, 2002. (Note: Effective Jan. 1, 2005, the amount of the standard deduction and the width of the 15% bracket for married couples are both scheduled to revert to the levels established under EGTRRA 2001.)
Child Tax Credit. The amount of the child tax credit rises from $600 to $1,000 in 2003 and 2004, accelerating the increase that was scheduled to occur between 2005 and 2010. The increased amount of the credit ($400) will be paid in 2003 in the form of advanced payments, similar to the advance payment checks that were issued in 2001 to reflect the new 10% tax bracket. The payments will be based on information on taxpayers 2002 tax returns filed in 2003. In general, taxpayers will receive checks of $400 for each qualifying child (i.e., maximum of $800 for two or more qualifying children). The IRS will issue notices to taxpayers on July 23, July 30 and Aug. 6 informing them of their advance payment amounts. The checks will be mailed to taxpayers in batches beginning in July 2003. (Note: Effective Jan. 1, 2005, the amount of the child tax credit will revert to the levels established under EGTRRA 2001.)
Alternative Minimum Tax. For tax years 2003 and 2004, the act increases the exemption amounts under the alternative minimum tax. For married couples filing jointly (and surviving spouses), the exemption amount increases from $49,000 to $58,000. The exemption amount for single individuals increases from $35,750 to $40,250. For married couples filing separately, the exemption amount increases from $24,500 to $29,000. It should be noted that these exemption amounts are scheduled to decrease after 2004, which will have the effect of causing more people to be subject to the AMT.
Sonya E. King, J.D., LL.M, is an assistant editor for Tax Facts, a National Underwriter Company publication.
Reproduced from National Underwriter Edition, June 9, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.