ROGER A. KAHAN
Tax and Business Advisor, Wealth Care Professional
Serving the tax and financial needs of individuals and small to medium businesses
1214 Park St., Suite 203
Stoughton, MA 02072-3738
VOICE: 781.963.RAK-1 (963-7251)
E-mail: kahan@rak-1.com

This Newsletter will bring you up-to-date
2003 Tax Law Changes
10% Bracket Expanded
Marriage Penalty Relief
Investors Win: Lower Capital Gains Rates
Investors Win: Dividends Taxed at 15%
Families Win: Child Tax Credit Increased
Tax Breaks for Businesses Included in 2003 Tax Law
Conclusion

With the stroke of his pen, President George Bush signed (May 28) into law the Jobs and Growth Tax Relief Reconciliation Act of 2003. The new law contains $330 billion worth of tax cuts.

The 2003 tax act appears to offer something for almost everyone.

Tax Brackets Reduced

One of the most significant features of the legislation is the lowering of income tax brackets effective for 2003. The 2001 Economic Growth and Tax Relief Reconciliation Act provided that individual marginal tax rates gradually decline over several years. The 2003 legislation accelerated the reductions. The new tax rates/brackets are:
Now Was
35% 38.6%
33% 35%
28% 30%
25% 27%
15% 15% (no change)
10% 10% (no change)

Note: Rates are retroactive to January 1, 2003.

Single taxpayers with taxable income over $6,000, or a married couple with taxable income over $12,000 (head-of-household remains at $10,000), will benefit from the acceleration of the expansion of the 10% bracket. Under the 2001 legislation, the 10% bracket was scheduled to increase to $7,000 for singles and $14,000 for joint filers in 2008.

The 2003 legislation expands the 10% tax bracket now and the expansion is effective for tax years 2003 and 2004. In 2005, the thresholds revert back to $6,000 and $12,000 respectively and remain there until they are bumped up again in 2008.

The 10% tax bracket amounts are adjusted for inflation in 2004 and then again in tax years beginning after 2008.

The new tax law changes the so-called marriage penalty rules of the tax code. The marriage penalty is a feature of the tax code that, in some cases, leaves two working spouses worse off taxwise than they would be as singles. The marriage penalty comes about because some features of the tax laws don’t always double for married couples.

For 2003 and 2004, the new law makes the standard deduction for married taxpayers filing jointly twice that of singles: $9,500 for the married couple filing jointly and $4,750 for single taxpayers.

The new law expands the 15% tax bracket for married couples filing jointly to double that of single taxpayers. The expansion of the 15% bracket to eliminate potential marriage penalties benefits all joint filers with income over $47,450, though some marriage penalty kicks in again for married couples starting above $114,650 in income.
After 2004, both the standard deduction and the 15% rate bracket expansion provisions “sunset,” meaning that the rules go back to the 2001 standards unless Congress decides to re-enact the changes.

The Massachusetts Society of CPAs represents over 8,800 certified public accountants working in public accounting, industry & business, government and education.

Planning for the future is a lot like planting a tree. You’ve got to do it today if you want your family to enjoy it tomorrow.

Did you know we do more than just prepare, compile, and crunch numbers? We are not just “bean-counters.” We can also advise you on estate and business planning and offer financial strategies to meet your goals. As your CPA, we know your needs better than any other professional.

Investors come out a very big winner under the 2003 tax bill. The top capital gains rate will fall from 20% to 15%. The lowest capital gains rate will decrease to 5% from 10%. Note that the lower rates are effective for transaction after May 5, 2003. The lower rates are scheduled to expire after 2008.

The paperwork on capital gains for 2003 has the potential to be a nightmare and our office is here to assist you with this project. Long-term gains on sales made through May 5 will be taxed at up to 20% or 10% where sales made after May 5 will be taxed at 15% or 5%. There is no increase to the $3,000 annual limitation on deducting excess capital losses.
Taxpayers in the lowest two brackets (10% and 15%) will be a one-year bonus in 2008 when they will pay no federal taxes on capital gains. The tax is reinstated after 2008.

Dividend income is currently taxed as ordinary income. Under the 2003 tax legislation, the top dividend rate is lowered to 15%. Taxpayers in the lowest two tax brackets will pay 5%. This is a very significant change when you consider the fact that the current top rate for dividends is 38.6%. The new lower rates are effective for qualified dividends received after December 31, 2002. That’s right – all qualifying dividends received this year will be taxed at the lower rates of 15% and 5% respectively.

Taxpayers in the lowest two brackets will get a one-year bonus in 2008 when they will pay no tax on dividend income. The tax is reinstated after 2008.

DON’T FORGET:
“ IT’S NOT WHAT YOU MAKE THAT COUNTS; IT’S WHAT YOU KEEP!”

The child tax credit has been increased from the current $600 to $1,000. As a result some 24.4 million families are eligible to receive a $400 rebate check this summer. The Treasury Department and the IRS will rely on data in the system from 2002 tax returns. Taxpayers and their tax professionals are not required to take any additional steps to receive the checks. Of course there is one exception – if a taxpayer hasn’t filed (on extension) their 2002 federal tax return it might be in their best interest to do so in order to get their tax data and eligibility into the system. Taxpayers will receive a letter from the government in advance of the checks. The direct deposit option isn’t available – the checks must be mailed.

Parents, who give birth or adopted a child in 2003, will have to wait until they file their 2003 tax return to claim the full $1,000 credit.

The child tax credit phases out for married couples that earn more than $110,000 in AGI and single parents whose AGI exceeds $75,000.

Unless this increase in the child tax credit is extended by Congress, the credit will drop back to $700 in 2005 and $500 in 2011. After 2005, the credit will slowly build back up to $1,000 before falling to $500 in 2011. Talk about confusion.

The first round of rebate checks was mailed on July 25. The remaining checks were received in early August. The idea was to have eligible taxpayers receive the funds ASAP, with any luck spend the money, and in the process stimulate the economy. That’s the congressional game plan.

Not everyone with children will receive the rebate checks. An estimated 6.5-million minimum-wage families were excluded from the benefit due to the fact that “they do not pay or owe taxes.” This statement is very misleading since they do in fact pay a variety of taxes – just not the right ones for the child tax credit. While it is reasonably anticipated that Congress will correct this perceived injustice, the Senate, President Bush and the House appear to be at odds on how to resolve the issue. Congress left for its summer recess without making any progress on this issue.

On June 5, 2003, the U.S. Senate, in record-breaking time, voted (94-2) to make the child tax credit advance payment available to an additional 6.5 million taxpayers. President Bush is on record as supporting the extension. This issue has the potential to have serious political implications and the strong Senate vote illustrates that fact. The battle to expand the child tax credit is taking place in the House of Representatives.

Taxpayers can use the "Where's My Advance Child Tax Credit?" feature on irs.gov to find out the amount and mailing date of their checks. The website also explains any adjustments to payments for child support, taxes owed and other federal debts. Further, a description of the likely reasons that some individuals may not qualify for the advance payments is provided.

Have Questions? Call Us! We are here to help. If you have any questions please don't hesitate to contact us.

Continuing with the theme that the Jobs and Growth Tax Relief Reconciliation Act of 2003 offers something for almost everyone, the law increases the amount that business can “expense” or immediately write off, from $25,000 to $100,000. For 2003 through 2005, firms that put less than $400,000 of assets in use in a year can expense up to $100,000 of the cost in lieu of depreciation. The trigger point of the investment limitation phase-out increases from $200,000 to $400,000. The dollar limitations will be indexed for inflation during 2004 & 2005.

The increase in the so-called expensing deduction has the potential to assist businesses while also serving to stimulate the economy. The business community can be expected to leverage the available tax incentive.

Bonus depreciation is increased from 30% to 50% for post-May 5, 2003 acquisitions. The type of property that qualifies for this special allowance is unchanged from existing law. For the 50% allowance to apply, the property must be acquired after May 5, 2003, and b efore January 1, 2005. Note that if a binding contract to acquire the property was in effect before May 6, 2003, the property does not qualify for the 50% bonus depreciation (30% may be available). Taxpayers may elect out of bonus depreciation.