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Early in the morning of May 23, 2003, the House of Representatives, by a vote of 231-200, approved the conference report for H.R.2, the “Jobs and Growth Tax Relief Reconciliation Act of 2003,”containing significant income tax relief for individuals, investors and businesses alike. Later that day, the Senate passed it by a vote of 51-50, with Vice President Dick Cheney casting the tie-breaking vote. The President signed the law on May 28, 2003, approving what may prove to be the most significant tax changes in decades. A summary and highlights of the law follow.

Tax Cuts for Individuals

Increased child credit, partially refundable for 2003

For 2003 and 2004, the child credit increases to $1,000 per qualifying child up from the previous law's $600 per qualifying child for 2003-2004. After 2004, the child credit will drop back to $700 per qualifying child. For 2003, the increased amount of the child credit will be paid in advance beginning in July or August 2003 on the basis of information on each taxpayer's 2002 return filed in 2003. The payments will be made in a manner similar to the advance payment checks issued by Treasury in 2001 to reflect the creation of the 10% regular income tax rate bracket.

Marriage-penalty relief

The following marriage-penalty relief provisions apply for 2003 and 2004 only:

• The basic standard deduction amount for joint returns will be double the basic standard deduction amount for single returns. For tax years beginning after 2004, a joint return filer's basic standard deduction will revert to levels enacted by the 2001 EGTRRA (e.g., for 2005, to 174% of a single return filer's basic standard deduction).
• The end point of the 15% tax bracket for joint returns will be twice the end point of the 15% tax bracket for single returns. For tax years beginning after 2004, the end point will revert to the levels enacted by the 2001 EGTRRA (e.g., for 2005, 180% of end point of 15% tax bracket for single returns).

Accelerated increase in 10% rate bracket

For 2003 and 2004, the 10% tax bracket ends at $14,000 of taxable income for joint filers and $7,000 for single filers and married filing separately (up from $12,000 and $6,000 respectively). The increased figures will be indexed in 2004. The 10% bracket for a head-of-household is unchanged (it continues to end at $12,000 of taxable income). From 2005 through 2007, the end point of the 10% bracket will revert to the $12,000/$6,000 levels (and under the 2001 EGTRRA, will go up to $14,000/$7,000 for 2008 through 2010).

Accelerated reduction of tax brackets above 15%

For 2003 and thereafter, the tax rates above 15% are 25%, 28%, 33%, and 35% (previously, rates for 2003 above 15% were 27%, 30%, 35%, and 38.6%). After 2010, rates above 15% will revert to the pre-2001 EGTRRA levels.

Increased AMT exemption amount

For 2003 and 2004, the maximum AMT exemption amount is $58,000 for joint filers and surviving spouses, $40,250 for unmarried taxpayers, and $29,000 for married filing separately, reverting to $45,000, $33,750, and $22,500, respectively, after 2004.

Expensing election

The following Section 179 expensing changes are effective for property placed in service in tax years beginning in 2003, 2004, and 2005:

• The maximum annual expensing amount is $100,000 (it was $25,000).
• The maximum annual expensing amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds a specified dollar level. This dollar level is increased to $400,000 (it was $200,000).
• The above increased dollar amounts are inflation-indexed for tax years beginning after 2003.
• Off-the-shelf computer software will become eligible for expensing (it was ineligible).
• Taxpayers may revoke expensing elections on amended returns without IRS consent. Under previous law, expensing was revocable only with IRS consent.

Increased bonus first-year depreciation

In general, 30% additional first-year depreciation allowance applies to the non-expensed portion (under Section 179) of qualified property (which includes most new MACRS property) if: (1) its original use commences with the taxpayer after Sept. 10, 2001; (2) the asset is acquired by the taxpayer after Sept. 10, 2001 and before Sept. 11, 2004, and (3) it is placed in service by the taxpayer before 2005 (before 2006 for certain property with longer production periods).

Under the new law:

• For 30% bonus first-year depreciation purposes, qualifying property may be acquired before 2005.
• 50% bonus first-year depreciation applies to qualified property if (1) its original use commences with the taxpayer after May 5, 2003; (2) the asset is acquired by the taxpayer after May 5, 2003 and before 2005 (there can't be a written binding contract for acquisition in effect before May 6, 2003); and (3) it is placed in service by the taxpayer before 2005 (before 2006 for certain property with longer production periods).

• There is no AMT depreciation adjustment for the entire recovery period of qualified property recovered under the bonus first-year depreciation rules (50% or 30%). Taxpayers may elect on a class-by-class basis to claim 30% instead of 50% bonus first-year depreciation for qualifying property, or elect not to claim bonus first-year depreciation at all. Two situations in which a taxpayer will likely consider making an election to claim smaller bonus first-year depreciation, or to elect out of it entirely, are where the taxpayer (1) has about-to-expire net operating losses, or (2) anticipates being in a higher tax bracket in future years.
• Taxpayers are first allowed the expensing deduction, then the bonus depreciation on the remaining cost, and then “regular” depreciation on any cost still remaining.

Corporate estimated tax payment

In general, corporations must make quarterly estimated tax payments of their income tax liability. For a corporation whose tax year is a calendar year, estimated tax payments must be made by Apr. 15, June 15, Sept. 15, and Dec. 15. Under the new law, any corporate estimated tax, which is otherwise due on September 15, 2003, won't be due until October 1, 2003.

Reduced Rates for Capital Gains & Dividends

Under previous rules, an individual's adjusted net capital gain generally is taxed at a maximum rate of 20% (10% if it would otherwise be taxed at 10% or 15%) for regular tax and AMT purposes. Adjusted net capital gain is net capital gain (net long-term capital gains exceeding net short-term capital losses) less 28% rate gain (affecting collectibles and certain small business stock) and less 25% rate gain (generally, gain representing depreciation claimed on MACRS realty). Gain from property held more than five years that would otherwise be taxed at 10% is taxed at 8%, and gain from property held more than five years and the holding period for which begins after 2000, which would otherwise be taxed at 20%, is taxed at 18%.

Dividends received by an individual currently are taxed as ordinary income at rates up to 38.6% (for 2003).

Under the new law:

• Effective for sales and exchanges (and payments received) after May 5, 2003, and before Jan. 1, 2009, the 10% and 20% rates on adjusted net capital gain are reduced to 5% (zero, in 2008) and 15% respectively, for both regular tax and the AMT. The lower rates apply to assets held more than one year.
• Effective for dividends received in tax years beginning after 2002 and before 2009, dividends received by an individual shareholder from domestic corporations are treated as net capital gains for purposes of applying the capital gain tax rates. In other words, the dividends are taxed at rates of 5% (zero, in 2008) and 15% for both regular tax and AMT purposes. Special rules and exclusions apply. For example, if a shareholder doesn't hold a share of stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date, dividends received on the stock won’t be eligible for capital gain rates. Not all corporate distributions are entitled to tax-reduced dividend treatment, creating a new web of complex rules for both shareholders and corporations alike. Stay tuned.

Provisions Omitted from the 2003 Tax Act

There were some provisions that were discussed in the formulation of the Act, but were omitted from the final bill. These provisions are as follows:

1. No permanent repeal of the estate tax

Under the 2001 Act, estate, gift and generation-skipping transfer taxes are being reduced for years 2002 to 2009. The estate and generation-skipping transfer tax (not the gift tax) is to be repealed in 2010. The top gift tax rate in 2010 will equal the top individual income tax rate. The scheduled repeal of the estate tax in 2010 is still scheduled to sunset in 2011.

The annual gift tax exclusion of $11,000 and the current unified credit of $1million remain in place.

2. No acceleration of the repeal of phase-out of personal exemptions

Under the 2001 Act, the phase-out of personal exemptions begins at $209,250 of adjusted gross income for joint filers in 2003. This phase-out will gradually be reduced during the upcoming years and repealed in total after 2009.

3. No acceleration of the repeal of limitations on itemized deductions

Under the 2001 Act, there is a limitation on itemized deductions by 3 percent of adjusted gross income in excess of $139,500 for joint filers in 2003. The phase-out for this provision will begin in 2006 and will be fully repealed for years after 2009.

4. No extension of the five-year net operating loss carryback period

Under the 2002 Act, the two-year carryback was extended to five years. This provision is only effective for net operating losses arising in tax years ending in 2001 and 2002.

5. No extension of the research and experimentation tax credit

This provision generally applies to amounts paid or incurred prior to July 1, 2004.

This summary is meant to be a brief description of the tax cuts affecting both individuals and businesses in the new law. It does not cover all the tax benefits and planning opportunities that apply to any specific business or personal situation. Careful planning will have to be exercised to make the most of the tax relief in JGTRRA'03. This is especially true because of the retroactive effective dates and the temporary duration of many of the provisions.

Any transactions that are already in the works, and those you may have previously planned, may need to be reviewed to see how the new law affects them – revisions may be necessary. The good news is, many tax savings opportunities may now exist that did not previous to this laws enactment. There may be new personal and/or business projects or investments that the new law will enable you to undertake which were not possible before its passage. Please feel free to call us today so we can discuss a tax strategy to best take advantage of the new provisions.

For the entire text of the Jobs and Growth Tax Relief Reconciliation Act of 2003 go to http://www.unclefed.com/Tax-Help/legislation/hr2_final.html