Jobs and Growth Tax Relief Reconciliation Act of 2003 - Fielder and Company, Certified Public Accountants, Tampa, FL

Jobs and Growth Tax Relief Reconciliation Act of 2003

June 2003

Dear Clients and Friends,

The recently passed tax act of 2003 significantly changes the way individual investors are taxed on dividends and capital gains, accelerates planned future tax rate reductions and child tax credit increases for individuals to 2003, and greatly increases acquisition year depreciation deductions for business asset purchases. Beneficiaries of this much heralded third largest tax reduction act in our history include (1) nearly all individuals required to file tax returns this year with taxable incomes above $6,000 as individuals and $12,000 as a couple, particularly higher income taxpayers, (2) those with long-term capital gains realized after May 5, 2003, or dividend paying investments from qualifying corporations (not interest distributions) anytime this year, (3) taxpayers with dependent children not yet 17 years old by 2003 year end and incomes less than $75,000 (if single) or $110,000 (if married filing jointly), (4) married filers and (5) those businesses which acquire non-real estate business property after May 5, 2003:

1. Individual Tax Rate Reductions --

A. 10% bracket increases by $1,000 to $7,000 for single filers and $2,000 to $14,000 for married taxpayers filing jointly saving those with taxable incomes beyond that level $50 and $100, respectively, on this 5% rate decrease for 2003 and 2004.
B. The four tax rates above 15% are reduced as follow effective January 1, 2003, for future years through 2010:

To 25% vs. 27%
To 28% vs. 30%
To 33% vs. 35%
To 35% vs. 38.6%

These rate reductions translate to 2 cents per ordinarily taxable dollar savings above the 10% maximum rate level (see A. above) to $311,950 for single and married joint filers (saving in excess of $5,000 taxes to each group at that income level) and 3.86 cents per ordinarily taxable dollar above $311,950, particularly benefiting owners of pass-through entities (e.g. S corporations and partnerships) of high profitability.

C. Alternative minimum tax (AMT) exemption amounts are increased by $4,500 to $40,250 for single taxpayers and by $9,000 to $58,000 for married joint filers. As regular tax rates decrease without substantive revision to the AMT tax, significantly more taxpayers will become subject to these higher "stealth" tax rates.

2. Individual Dividend and Capital Gain Rate Reductions --

A. Long-term capital gains tax rate is reduced 5% after May 5, 2003, from 20% to 15% (and from 10% to 5% for levels in the 15% tax rate bracket or less, with the 5% rate falling to zero after 2008).
B. Dividends received by individuals from domestic or qualifying foreign corporations in 2003 through 2008 are taxed at the same rates as long-term capital gains (see 2.A. above), though are not eligible for reduction for capital losses.

3. Increased Child Tax Credit --

A. The child tax credit increases from $600 to $1,000 per claimed dependent child younger than 17 years on December 31 in 2003 and 2004 for eligible taxpayers (income limitations apply with phase-outs beginning at $75,000 for single taxpayers and $110,000 for married joint filers). The U S Treasury will begin mailing advance payment checks up to $400 per child in July of 2003 based upon information from 2002 returns filed. Should an ineligible taxpayer in 2002 become eligible in 2003, the credit will be claimed on the 2003 return. Unqualified 2003 advance payments will not be subject to repayment (but watch for IRS procedures expected to be implemented to alert IRS to advance payments to separated parents of a qualifying child who won't be taking the exemption in 2003).

4. Married Taxpayers Receive Additional Rate Reductions

A. The 15% bracket is increased to double the single bracket for 2003 and 2004. This results in 2003 tax savings up to $1,122 per couple, whether filing is joint or separate.
B. The married standard deduction is increased to double the single amount for 2003 and 2004. The amount saved will be your marginal (highest) tax rate times $1,550 (the difference in $9,500 and $7,950). That would be about $388 in the 25% rate bracket.

5. Business Property Acquisition Expensing and Depreciation Increased --

A. Code section 179 expensing limit for qualified depreciable property write-off against profits in year of acquisition increases to $100,000 from $25,000 beginning 2003 through 2005, with amounts indexed for inflation from 2004 to 2005. Additionally, the starting dollar amount for reduction of this expensing election is raised to $400,000 of total property purchases in the year (with complete phase-out at $500,000) vs. $200,000 per year (with complete elimination at $225,000) with off-the-shelf computer software added to eligible property and amounts indexed for inflation in 2004 and 2005.
B. The code section 168 bonus depreciation allowable in the first year increases from 30% to 50% for purchases after May 5, 2003. Election is available on per class basis, and taxpayers may elect out of the 50% allowance to zero or 30% on a class by class and year to year basis. Bonus depreciation is not subject to AMT. Bonus depreciation for listed property (subject to limitation) adds $7,650 to first year allowable depreciation after May 5, 2003, instead of $4,600 before May 5 if the auto or other property is used more than 50% for business. Total first year allowable depreciation rises, therefore, from $7,660 to $10,710 where there is 100% business use.

COMMENTS ON 2003 TAX ACT IMPLICATIONS

Major beneficiaries of these rate reductions and credit and expensing increases are higher income individuals, particularly those collecting dividends personally and having capital gains outside retirement or other sheltered accounts, qualifying families with dependent children under 17, and businesses which acquire significant qualifying depreciable assets in the next couple of years.

Individuals may realize savings earlier than tax due date by reducing estimated tax deposits to account for anticipated tax reductions if income increases aren't expected to offset those tax breaks, and salary withholding will be reduced as employers utilize the new withholding tables, Publication 15-T, available at www.irs.gov and being mailed to employers in June 2003. Advanced child tax credit checks are being mailed beginning July for those who have filed 2002 returns with qualifying dependents and income levels.

Because of the greatly increased incentive to investors to make equity investments personally (as opposed to within sheltered accounts which are taxed at higher ordinary rates when withdrawn), investment selection and allocation of investments strategies should be freshly examined and in many cases revised. There is increased incentive to hold dividend paying and higher risk/return long-term equity investments personally, and ordinary income, safety oriented investments (such as taxable bonds, CDs, treasuries, etc.) in sheltered retirement accounts, with the exception of Roth IRA accounts which can avoid all taxation. The appeal of annuity purchases has definitely declined in light of these changes in investment taxability.

Business owners have greater motivation to make needed and possibly postponed equipment and other business asset purchases by year end to help fund with tax breaks, on top of cheaper financing options now available. Section 179 election remains available for SUV and other vehicle purchases for business use weighing over 6,000 pounds gross weight.

Sunset, phase-out and other eligibility qualifications coupled with AMT make these provisions even more complicated than in the past. Since many current reductions decrease or disappear entirely beginning 2005, 2008 and especially 2011, much planning uncertainty exists in the long term to challenge the usual advice to defer income realization, although the recent past trends favored future decreases.

Cash rewards for informed tax planning have been sweetened considerably, although planning has become even more challenging. Consult with us anytime you need assistance. This and prior tax planning letters are always available by visiting this web site at www.fielderco.com

Sincerely,
Jim Fielder, Jr.