Jobs and Growth Tax Relief Reconciliation Act of 2003 (H.R. 2)
President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 on May 28, 2003. The following is a brief summary of the more notable tax provisions. Many of the provisions in this new tax law are only temporary, applying to 2003 and 2004. After 2004, the provisions enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 will once again become effective.
Child Tax Credit
For 2003 and 2004, the child tax credit increases from $600 to $1,000. The $400 increase will be paid in advance starting in July for those who have filed a 2002 tax return. The advance will be calculated from information on the taxpayer’s 2002 tax return. The amount of the 2003 child tax credit that taxpayers can claim in 2003 will be reduced by the advance payment.
In 2005, the child tax credit is scheduled to fall back to $700, but will gradually rise to $1,000 by 2010 under the Economic Growth and Tax Relief Reconciliation Act of 2001.
Marriage Penalty Relief
For 2003 and 2004, the standard deduction for married couples will double to twice the amount of the standard deduction for single taxpayers. In 2005, the standard deduction for married taxpayers will fall to 174 percent of the standard for single taxpayers, then gradually rises to double the amount by 2009.
For 2003, the standard deduction for single taxpayers remains at $4,750. The standard deduction for married taxpayers will rise to $9,500. Married taxpayers filing a separate return will claim the same standard deduction as a single person.
For 2003 and 2004, the 15 percent tax bracket will be twice that for joint filers as it is for single filers. After 2004, the 15 percent tax bracket falls to 180 percent of the maximum taxable income in the same bracket for unmarried individuals, as adjusted for inflation.
Tax Brackets Income levels for the 10 percent tax bracket are increased to $7,000 for single taxpayers and to $14,000 for joint filers for 2003. In 2004, these income levels will be indexed for inflation. This relief is temporary. The old thresholds of $6,000 and $12,000 will reappear in 2005.
New tax rates, retroactive to January 1, 2003 are 10, 15, 25, 28, 33, and 35 percent for individuals.
Capital Gains Rates
The maximum capital gain tax rate drops from 20 percent to 15 percent. The current 10 percent rate for lower income taxpayers drops to 5 percent.
These new rates are effective for sales and exchanges taking place on or after May 6, 2003, and through December 31, 2007. The 15 percent rate continues in 2008. The lower rates apply for both regular tax and alternative minimum tax purposes.
In 2008, the 5 percent rate for lower income taxpayers drops to 0 percent, but only for 2008. On January 1, 2009, the 10 and 20 percent rates are reinstated.
The lower rates for property held five years or more is effectively repealed until 2009. These rates were 18 percent (8 percent for lower income taxpayers). The 8 percent rate is repealed effective May 6, 2003. Those taxpayers who would have qualified the 18 percent rate for sales in 2005-2008 receive no additional benefit other than the lower 15 percent rate.
NOTE: The maximum rate for long-term gains from the sale of some assets, such as collectibles, remains at 28 percent. Also, unrecaptured Section 1250 gain remains unchanged at the maximum 25 percent.
Alternative Minimum Tax (AMT)
For 2003 and 2004, the AMT exemption amount is increased to $58,000 for married taxpayers and to $40,250 for unmarried taxpayers.
Section 179 Expensing
For 2003, taxpayers can expense up to $100,000 in qualifying property. The phase-out threshold increases from $200,000 to $400,000. For 2004 and 2005, this amount will be indexed for inflation. The new law allows taxpayers to make or revoke a Section 179 expense election without first obtaining the consent of the IRS.
For 2003-2005, taxpayers can expense off-the-shelf computer software under Section 179.
The additional 30 percent bonus depreciation increases to 50 percent for qualifying property placed in service after May 5, 2003 and before January 1, 2005. The definition of qualifying property has not changed. Qualifying property must still be brand new property with a class life of 20 years or less. The new law increases the bonus depreciation amount that may be taken with respect to passenger automobiles from $4,600 to $7,650.
The 30 percent bonus depreciation continues to apply to property purchased between September 11, 2001, and May 6, 2003.
Corporate Estimated Tax Payments
The third quarter estimated tax payment for corporate taxpayers that is normally due on September 15, 2003, is not required to be paid until October 1, 2003.
Taxation of Dividends
Dividends received by an individual shareholder from a domestic or qualified foreign corporation will be taxed in the same manner as capital gain income. This translates to 15 percent for most taxpayers and 5 percent for taxpayers at lower income levels
Although this provision is retroactive to January 1, 2003, it is temporary, terminating on December 31, 2008. The 5 percent rate terminates on December 31, 2007 and falls to 0 percent for 2008.
This one-year break only applies to taxpayers in the 10 and 15 percent tax brackets. Certain types of dividends are specifically excluded from the definition of "qualified dividend income" for purposes of the new law. The exclusion applies to:
Amounts that would be deductible under IRC Section 591 (i.e., dividends paid on deposits in a mutual savings bank, credit union, savings and loan, etc.)
Any dividend described in IRC Section 404(k).
Dividends paid under IRC Section 246(c) that fail to meet the revised holding period; or
The extent that the taxpayer is under a payment obligations under IRC Section 246(c).
The new tax law also provides additional guidance with regard to dividend income. Dividends are to be treated as investment income (if the taxpayer elects) for purposes of IRC Section 163(d)(4) which limits the amount of the investment interest deduction. What this appears to means is that taxpayers will not be allowed both the benefit of the lower tax rates and the treatment of this dividend income as net investment income for purposes of deducting investment interest.
A "qualified foreign corporation" is an entity incorporated within a U.S. possession or is eligible for the benefits of a U.S. tax treaty. Dividends paid by a foreign corporation that are not qualified are eligible for the lower rates if the stock is traded on an established U.S. equities market.
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