New Tax Law Has Something For Just About Everyone

By Melinda M. Boswell



Passing by the narrowest of margins in the Senate, the Jobs and Growth Tax Relief Reconciliation Act of 2003 became law on May 28. With a projected $330 billion reduction in tax collections, the new law has something for just about everyone. The Treasury Department estimates that more than 1.8 million Marylanders will benefit from the Act, many almost immediately.

The primary objectives of the new law are to put more money into the hands of consumers, to encourage investment in stocks and to provide additional incentives for businesses to buy assets - in other words, to jump start a sluggish economy. Most of these changes are short-term, in that they only apply for the next few years. After that, the old rules are scheduled to come back. Here's a breakdown of how the major provisions of the law impact different types of taxpayers:



Workers

Beginning in July, many workers will see less tax taken from their paychecks. An individual's federal tax liability is determined by applying graduated tax rates to income. The new act raises the amount of income taxed at the lowest bracket (10%), which results in less tax paid overall. The government has already issued revised withholding tables for employers to reflect these changes.



Families

Many families with small children (under age 17) receive a credit of up to $600 per child. Unlike a deduction, which reduces your taxable income, a credit is a dollar-for-dollar reduction in tax. The new law increases the maximum "child tax credit" to $1,000 per child, effective immediately. If you claimed this credit in 2002, the government will assume you qualify for 2003, and will send you a check this summer as an advance against your 2003 credit. This benefit is aimed primarily at middle-income families, as the credit is phased-out for those with higher incomes (over $110,000 for married parents, $75,000 for singles).

The Act also reduces the much criticized "marriage penalty." Prior to this change, married couples often paid more tax as a couple than they would have as singles. Two changes rectify this situation: The basic standard deduction for joint filers is now twice that of singles, and the size of the 15% bracket for joint returns is now twice the size of that bracket for singles.



Investors

In one of the more controversial pieces of the legislation, most dividends are now taxed at the same rate as capital gains - and those rates are going down. The highest dividend/capital gain tax rate drops from 20% to 15%, and those in the lower brackets (10% and 15%) will now benefit from a 5% tax rate (0% in 2008). While the new rate on dividends is retroactive to January 1, 2003, the rate for capital gains only applies to sales after May 5, 2003.

However, those with investments in real estate, beware. The new law apparently does not remove the special 25% tax rate applied to "unrecaptured Section 1250 gains," which represent gain to the extent of most prior depreciation on real property.



Individual Rates

The new law makes several changes to the individual tax rates themselves. The highest tax rate drops from 38.6% to 35%. The three mid-range rates go from 35% to 33%, 30% to 28%, and 27% to 25%, respectively.



About AMT

The Alternative Minimum Tax (AMT) is a parallel tax system originally designed to ensure that individuals with large deductions or credits paid at least a certain minimum amount of tax. Taxpayers must calculate their tax both ways, and pay the higher of the two. However, over the years its grasp has exceeded the primary intent, and now middle-income taxpayers with an average amount of deductions are increasingly finding themselves caught in the AMT web.

Part of the reason for this is the difference between regular tax rates and AMT rates. For individuals, AMT has just two rates - 26% and 28%. Therefore, as regular income tax rates fall, more and more taxpayers are forced into AMT. To help offset this predicament, the new act increases the AMT exemption amounts to $58,000 for married taxpayers (up from $49,000) and $40,250 for singles (up from $35,750).



Overall Benefit to the Average Family

While the impact of the new law will vary widely, here are the average annual savings taxpayers can expect at various income levels:



Businesses

Two provisions of the act target business and specifically encourage businesses to purchase the technology, machinery and other equipment they need to grow.

A business usually recovers the cost of assets over an extended period of time through annual depreciation deductions. However, small businesses can take advantage of a special expensing provision under IRC Section 179 that allows a current tax write-off. Under the new act, the dollar amount of potential Section 179 expense increases from $25,000 a year to a whopping $100,000 a year. In addition, the definition of a "small" business expands. In the past, businesses with more than $200,000 of annual fixed asset additions were phased out of their ability to use this special election. Now, that threshold increases to $400,000.

Also, any business, regardless of size, can now immediately expense 50% of many fixed asset purchases - up from the 30% "bonus depreciation" introduced in the 2002 law. The purchase must take place after May 5, 2003, and the assets must be brand new.

In addition to the tax cuts, the new law also provides $20 billion in aid to states. Therefore, many are hopeful that, unlike the 2002 legislation, states such as Maryland will allow businesses also to claim these deductions on their state income tax returns.



Summary

The 2003 tax act promises federal tax relief to almost every taxpayer. The information provided here is merely an overview - many of these provisions are complex, and most of the changes are temporary. However, professional assistance can help you take advantage of the numerous planning opportunities presented.



Melinda M. Boswell, CPA, is tax manager for Peacock, Condron, Anderson & Co., a division of PCA Group, a Columbia-based regional accounting and consulting firm that provides services to businesses, trade associations and other nonprofit organizations. She can be reached at 410-720-5220.