Part 1 of a 2-part series
By Craig M. Billmeyer
Bradshaw, Steele, Cochrane & Berens, L.C.
On May 23, just before the Memorial Day recess, the House and Senate passed sweeping tax cut legislation in response to pressure from the White House. Specifically the new law lowers the taxation of dividends and capital gains, accelerates the 2001 marginal rate cuts, and allows businesses to accelerate depreciation deductions on their investments.
Other provisions accelerate the reduction of the Marriage Penalty, provide for acceleration of the Child Care Credit and increase the Alternative Minimum Tax Exemption. Although there was no further clarification or relief in the areas of Estate and Gift Tax, the changes as passed appear to afford temporary, but legitimate relief.
The timing provisions of act are quite interesting. Some are applied retroactive to Jan. 1, 2003, while others are implemented for gains recognized on or after May 6, 2003. Some provisions accelerate prior promised reductions, while other provisions return to prior schedules in 2005 or are eliminated altogether after their sunset date of Dec. 31, 2008. This is the first of a two-part series that will highlight some of these changes.
|New Tax Rate||Old Tax Rate|
|10 percent||10 percent|
|15 percent||15 percent|
|25 percent||27 percent|
|28 percent||30 percent|
|33 percent||35 percent|
|35 percent||38.6 percent|
Acceleration of reduction in income tax
The 10 percent bracket is temporarily expanded for 2003 and 2004 for both married couples and single filers. This expansion, originally scheduled for 2008 is accelerated to apply in 2003 and 2004. The endpoint of the 10-percent tax bracket increases from $12,000 of taxable income to $14,000 for married couples and $6,000 to $7,000 for singles.
Comparison of tax rates
There is a reduction of all but the two lowest income tax brackets. These changes are accelerated from their original implementation in 2006. The resulting new rates are compared to the preexisting rates in the table. The new rates will benefit married couples with taxable income over $47,450 and single taxpayers with taxable income in excess of $28,400. The new marginal rates are effective retroactive to Jan. 1, 2003.
Relief from marriage penalty
For 2003 and 2004, the act raises the standard deduction for married couples filing jointly to twice the standard deduction for single taxpayers. These provisions were scheduled to phase-in over the period between 2005 and 2009. In 2005 the standard deduction for married couples returns to 174 percent of the standard deduction for single taxpayers. Thereafter it will be 184 percent in 2006, 187 percent in 2007, 190 percent in 2008 and 200 percent in 2009 and thereafter. During 2003 and 2004, the income range in the 15 percent tax bracket for couples filing joint returns is 200 percent of the amount applicable to single filers. In 2005 it is reduced to 180 percent and gradually rises again until 2008 when it returns to 200 percent.
Reduction in tax rates on dividends
Effective Jan. 1, 2003, instead of being taxed at ordinary income rates, dividends paid by most corporations will have a maximum tax rate of 15 percent. For taxpayers in the 10 percent and 15 percent ordinary income tax rate brackets, the tax rate on dividends is 5 percent from 2003 through 2007 and in 2008 there is no income tax on qualifying dividends. This law sunsets after Dec. 31, 2008.
Reduction in tax rates for capital gains
Effective for gains realized on or after May 6, 2003, net capital gains for individuals will have a maximum tax rate of 15 percent (down from 20 percent). For taxpayers in the 10 percent and 15 percent ordinary income tax rate brackets, the tax rate on net capital gains is 5 percent (down from 10 percent) from 2003 through 2007 and in 2008 there is no income tax on net capital gains. Again, this law sunsets after Dec. 31, 2008. This particular change offers tremendous planning opportunities to donees that may qualify for these tax brackets.
These benefits, some retroactively effective, many temporary in nature, may well mandate immediate planning for strategical advantage. As with most major tax law changes, it is prudent to review these changes with your estate planning professionals including your attorney, CPA and financial planner. Current and contemplated transactions may need to be reviewed to maximize tax savings as they relate to your personal estate plan and business to capitalize on your after-tax profits.
Craig M. Billmeyer is an attorney and member of Bradshaw, Steele, Cochrane & Berens, L.C. in Cape Girardeau. His practice includes estate planning, corporate and business planning.