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New Relief Act Reduces Individual Income Tax, Expands Opportunities For Businesses

By Brad Gross

The Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law on May 28, providing a reduction in income taxes for individuals and expanded opportunities for businesses to significantly increase the expensing of purchases that would normally be subject to depreciation over a period of years.

We have detailed a summary of the major provisions of the Act affecting individuals and businesses:

Accelerated Child Tax Credit Increases

Under present law, the child tax credit is scheduled to be $600 for 2003 and 2004. The Act increases the amount of the child tax credit to $1,000 for 2003 and 2004. After 2004, the amount of the credit reverts to the level provided under present law. For 2003, the increased amount of the child tax credit (up to $400) will be paid in advance, beginning in July 2003, based on the information contained in the taxpayer's return for 2002. This provision is effective for taxable years beginning after Dec. 31, 2002, and before Jan. 1, 2005.

Accelerated Marriage Penalty Relief

The Act provides that the basic standard deduction amount for married taxpayers filing a joint return is twice the basic standard deduction amount for single individuals for 2003 and 2004. For taxable years beginning after 2004, the relationship between the standard deduction for joint filers and single filers reverts to present law.

Additionally, the Act increases the size of the 15-percent regular income tax rate bracket for married taxpayers filing joint returns to twice the width of the 15-percent regular income tax rate bracket for single returns for taxable years beginning in 2003 and 2004. For taxable years beginning after 2004, the rate brackets revert to present law.

These two provisions are effective for taxable years beginning after Dec. 31, 2002, and before Jan. 1, 2005.

Accelerated Reductions in Individual Tax Rates

The Act accelerates the increase in the taxable income levels of the 10-percent rate bracket so that the income levels currently scheduled for 2008 become effective in 2003 and 2004. Thus, for 2003, the taxable income level for the 10-percent regular income tax rate bracket for single individuals is increased from $6,000 to $7,000, and for married taxpayers filing a joint return from $12,000 to $14,000. For 2004, these amounts are indexed for inflation. For taxable years beginning after Dec. 31, 2004, the taxable income levels for the 10 percent rate bracket revert to the levels provided under present law.

The Act accelerates the reductions in the regular income tax rates in excess of the 15-percent regular income tax rate that are scheduled for 2004 and 2006. Thus, for 2003 and thereafter, the regular income tax rates in excess of 15 percent are 25 percent, 28 percent, 33 percent and 35 percent.

The Act also increases the alternative minimum tax exemption amount for married taxpayers filing a joint return and surviving spouses to $58,000, and for unmarried taxpayers to $40,250 for taxable years beginning in 2003 and 2004.

These three provisions are effective for taxable years beginning after Dec. 31, 2002, and before Jan. 1, 2005.

Individual Capital Gains Rate Reductions

The Act reduces the 10- and 20-percent rates on net capital gains to 5 percent (0 percent in 2008) and 15 percent, respectively. These lower rates apply to both the regular tax and the alternative minimum tax. The lower rates apply to assets held more than one year. This provision applies to sales and exchanges (and payments received) on or after May 6, 2003, and before Jan. 1, 2009.

Individual Dividend Tax Relief

Under the Act, dividends received by an individual shareholder from domestic and qualified foreign corporations generally are taxed at the same rates that apply to capital gains. This treatment applies for purposes of both the regular tax and the alternative minimum tax. Thus, under the provision, dividends will be taxed at rates of 5 percent (0 percent in 2008) and 15 percent. This provision applies to dividends received in taxable years beginning after 2002 and before 2009.

Special Depreciation Allowance for Certain Property

The Act provides an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property. Qualified property is defined in the same manner as for purposes of the 30 percent additional first year depreciation deduction provided by the Job Creation and Workers Assistance Act of 2002, except that the applicable time period for acquisition (or self construction) of the property is modified.

In general, in order to qualify for the 50-percent additional depreciation deduction, the property must be acquired after May 5, 2003, and before Jan. 1, 2005. Property does not qualify if there was a binding written contract for the acquisition in effect before May 6, 2003. Property for which the 50-percent additional first-year depreciation deduction is claimed is not eligible for the 30 percent additional first-year depreciation deduction. This provision is effective for taxable years ending after May 5, 2003.

Increase Section 179 Expensing

The Act provides that the maximum dollar amount that may be deducted under section 179 is increased to $100,000 for property placed in service in taxable years beginning in 2003, 2004, and 2005. In addition, for purposes of the phase-out of the deductible amount, the $200,000 amount is increased to $400,000 for property placed in service in taxable years beginning in 2003, 2004 and 2005. The dollar limitations are indexed annually for inflation for taxable years beginning after 2003 and before 2006.

The provision also includes off-the-shelf computer software placed in service in a taxable year beginning in 2003, 2004 or 2005 as qualifying property. With respect to taxable years beginning in 2003, 2004 and 2005, the provision permits taxpayers to make or revoke expensing elections on amended returns without the consent of the Commissioner. This provision is effective for taxable years beginning after Dec. 31, 2002.

In light of the significant rate reductions in this tax Act, a review of your remaining estimated tax payments may be appropriate.

Brad Gross specializes in providing tax and management consulting services to contractors as a member of the Dallas-based Lane Gorman Trubitt LLP accounting firm.