Taxes
2003 Tax Act Means Immediate Tax Savings for Many

Joe Ciardiello and Pete McKenna
Beers & Cutler
CPAs and Business Advisors
(Pete McKenna co-chairs DCBIA's Taxes and Impositions Committee)

 

Congress passed the 2003 Tax Act referred to as the Jobs and Growth Tax Relief Reconciliation Act of 2003 on May 23, 2003. It was signed into law by President Bush on May 28.

The tax savings of the 2003 legislation apply to all taxpayers and can be significant. Below are descriptions of most of the tax law changes and when they are effective. Both individual and business taxpayers should determine what impact the changes will have on their 2003 taxes and adjust their estimated tax payments or withholding accordingly. Consult with your tax advisor and estimate the potential immediate savings and how best to increase your cash flow.

This is the third tax bill in three years. The 2001 Tax Act (known as the Economic Growth and Tax Relief Reconciliation Act of 2001), was a ten-year tax cut of the individual income tax rates plus additional provisions. The 2002 Tax Act (known as the Job Creation and Worker Assistance Act of 2002) reduced taxes on business primarily through the 30% bonus depreciation provision. The 2003 Tax Act accelerates and expands portions of both the 2001 and 2002 tax legislation.

Accelerate Reductions in Individual Tax Rates

The tax rate reductions are accelerated retroactively to January 1, 2003. The new rates reduce the current 27, 30, 35 and 38.6 percent rate brackets to 25, 28, 33 and 35 percent. The alternative minimum tax exemption amount has increased slightly for 2003 and 2004 as well.

Individual Capital Gains Tax Rate Reduced

The maximum 20% tax rate on net long-term capital gains is reduced to 15%. For taxpayers in the 10-15% tax brackets, the capital gains tax rate is reduced to 5% (and to zero in 2008). The reduction applies for both the regular tax and the alternative minimum tax. The reductions apply for sales and exchanges and payments received on or after May 6, 2003 and before January 1, 2009.

Dividend Tax Relief for Individuals

Dividends received by an individual from domestic and qualified foreign corporations generally will be taxed at the same rate that applies to capital gains. This will be for both regular tax and alternative minimum tax purposes. Dividends will be taxed at 5% for taxpayers in the 10-15% tax brackets (and zero in 2008) and 15% for higher income taxpayers. The provision applies to dividends received in taxable years beginning in 2003 and before 2009.

50% Bonus Depreciation Allowance for Certain Property

The additional first year depreciation deduction provided in the March 2002 tax legislation and referred to as “bonus depreciation” is increased from 30% to 50% of the cost of qualified property. The cost of qualified property must be reduced by the bonus depreciation before computing the depreciation deductions in the year of purchase and later years. To qualify, the original use of the property generally must commence after May 5, 2003 and before January 1, 2005. Property does not qualify for the 50% rate if there was a binding written contract for the acquisition in effect before May 6, 2003 but will generally still qualify for the 30% bonus depreciation.

Bonus depreciation deductions and subsequent depreciation of the property are allowed in computing both the regular tax and the alternative minimum tax. This is a real help for those with significant property additions.

Qualified property includes: business property with a recovery period under the tax depreciation laws of 20 years or less such as computer software, vehicles, equipment, furniture and fixtures, land improvements, and qualified leasehold improvements. Qualified leasehold improvements generally includes improvements to the interior portions of nonresidential rental property made more than three years after the building was first placed in service. Related party leases do not qualify.

Section 179 Expensing Increase

The election to expense up to $25,000 of depreciable tangible personal property used in an active trade or business is increased to $100,000 for property placed in service in taxable years beginning in 2003, 2004, and 2005. For purposes of the phase-out of the expense election, the limitation has been increased from $200,000 of equipment investment to $400,000. The election now includes computer software placed in service in taxable years beginning in 2003-2005.

Other Provisions

The 2003 Tax Act also included several other provisions including marriage penalty relief and an increase in the child tax credit.

To provide what is referred to as marriage penalty relief, the basic standard deduction for joint filers is increased to twice the basic standard deduction for a single taxpayer for 2003 and 2004. This change had been scheduled to be phased in over 5 years beginning in 2005. In addition, the 15% regular income tax rate bracket is increased to twice that for single taxpayers effective for taxable years beginning in 2003 and 2004. These marriage penalty relief changes provide tax savings on all married filing joint returns.

The child tax credit was increased to $600 for 2001 and was scheduled to increase to $1,000 over ten years. The credit is now increased to $1,000 for 2003 and 2004. The $400 increase for 2003 will be paid in advance refund checks sent out to eligible taxpayers based on information on 2002 returns, beginning in July 2003. The full $1,000 child tax credit is available for taxpayers with adjusted gross income equal to or less than $110,000 for joint returns and lower thresholds for others.
Not Included in the 2003 Tax Act
Under current law, the DC tax incentives such as the wage credit, TIF financing and EZ bond provisions have a sunset provision of December 31, 2003. The provision was not extended in the 2003 Tax Act. It is still possible that the sunset date will be extended in other tax legislation later this year.

Summary

The 2003 Tax Act provides immediate tax savings for many taxpayers. When and how to take advantage of the changes that benefit you will depend on the specifics of your situation. For example, many taxpayers can obtain an immediate benefit from the 2003 Tax Act by adjusting their withholding or estimated tax payments to take into account the reduced income tax rates. Whether to change your investment strategy to take advantage of the reduced tax rates on capital gains and dividends requires detailed analysis and a discussion of the rules beyond the scope of this article. If you or your business plan expenditures for furniture and equipment or leasehold improvements, the substantial increases in depreciation deductions available can be a very pleasant surprise. In summary, there are a number of tax savings and tax deferral opportunities. With proper tax planning, you can best obtain the maximum savings.

For additional information, please contact Joe Ciardiello at (703) 637-7599 or Pete McKenna at (202) 449-4258, www.beersandcutler.com.

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