2003 new tax law

After several months of seeking a tax cut aimed at jump-starting the economy and creating jobs, President Bush got his wish when Congress delivered the Jobs Growth and Tax Relief Reconciliation Act of 2003 in late May.

Although the act falls short of the $726 billion in tax cuts originally sought by the president, it contains the centerpiece of the president's original proposal, an elimination of individual taxes on corporate dividends, and it is expected to result in a tax cut of $330 billion over 10 years.

Specifically, that act:

-- accelerates the income tax cuts included in the Economic Growth and Tax Relief Reconciliation Act of 2001;

-- reduces the "tax penalty" on married couples;

-- increases the child credit from $600 to $1,000;

-- reduces the number of individuals falling into the alternative minimum tax trap;

-- and cuts the individual tax rate on corporate dividends and capital gains.

Individual income tax cuts

The 2003 act increases the amounts taxed at only 10 percent for 2003 and 2004 to $14,000 for a married couple filing jointly and $7,000 for singles.

Look out, though, because the amount subject to the 10 percent rate reverts to current levels beginning in 2005 ($12,000 for marrieds filing jointly and $6,000 for singles) before increasing to the $14,000 and $7,000 amounts again in 2008. The 10 percent rate is scheduled to fade into the sunset for the tax years beginning after 2010.

Other rate reductions

JGTRRA also reduces individual income tax rates in excess of 15 percent to 25 percent, 28 percent, 33 percent and 35 percent.

The graph below illustrates the lower rates for marrieds filing jointly for 2003 and 2004:

$0...............................É $14,000 10 percent of taxable income

$14,000...........................$56,800 $1,400, plus 15 percent of the amount over $14,000

$56,800.........................$114,650 $7,820, plus 25 percent of the amount over $56,800

$114,650.......................$174,700 $22,282.50, plus 28 percent of the amount over $114,650

$174,700.......................$311,950 $39,096.50, plus 33 percent of the amount over $190,300

Over $311,950 ............. $84,389.50, plus 35 percent of the amount over $311,950

The rate reductions are subject to sunset. Beginning in 2011, the maximum tax rates increase to 28 percent, 31 percent, 36 percent and 39.6 percent.

The Treasury Department provides the following examples of the tax savings due to acceleration of the rate cuts:

Example 1: A married couple with one child and income of $40,000 will see their taxes decline under the act by $732 (from $2,235 to $1,503) in 2003, a decline of 33 percent.

Example 2: A married couple with two children and income of $75,000 will see their taxes decline under the act by $1,122 (from $5,817 to $4,695) in 2003, a decline of 19 percent.

Marriage penalty

A marriage penalty exists when the tax liability of a married couple filing a joint return exceeds the sum of what it would have been had each spouse filed as a single. A marriage penalty is most likely to occur where both spouses work, but one spouse's income is substantially greater than the other's.

The 2003 act seeks to eliminate the marriage penalty by doubling the standard deduction for marrieds filing jointly over that allowed for singles and increasing the size of the 15 percent rate bracket for marrieds filing jointly to twice that for singles. So, for 2003 and 2004, the basic standard deduction amounts are:

$4,750 for unmarried individuals; and

$9,500 for married individuals filing a joint return.

In those same years, the end point of the 15 percent rate bracket is $28,400 for singles and $56,800 for marrieds filing jointly. Keep in mind that the benefit of the marriage penalty relief is reduced for tax years beginning 2005 and is repealed for tax years after 2010.

Alternative minimum tax

The alternative minimum tax (AMT) was originally enacted to prevent high-income earners from minimizing their taxes by claiming deductions, exclusions and credits. Under the current tax system, individuals are required to compute both regular income taxes and alternative minimum taxes and pay the higher of the two.

JGTRRA increases the AMT exemption amount for married taxpayers filing jointly to $58,000, and for singles to $40,250, for taxable years beginning in 2003 and 2004. For tax years after 2004, the increased exemptions fade away into the sunset, unless Congress acts between now and then.

Child tax credit

In one of the most talked about provisions of the 2003 act, the child credit is increased to $1,000 per child for 2003 and 2004. Better yet, the increased amount will be paid in advance beginning in July 2003 and many taxpayers can expect to receive a $400 check this summer. The bad news -- the $1,000 credit is only around through 2004. It goes back to $700 in 2007-2008, increases to $800 in 2009, goes back up to $1,000 in 2010, then drops to $500 in 2011. Also, the credit is reduced by $50 for each $1,000 of income over $110,000 for marrieds filing jointly.

Capital gains and dividends

Also receiving a lot of attention is JGTRRA's reduction of the 20 percent rate for net capital gains (10 percent for low-income taxpayers) to 15 percent (5 percent). These new lower capital gains tax rates apply to tax years ending on or after May 6, 2003, and beginning before January 1, 2009. In an interesting twist, the 5 percent tax rate for lower income taxpayers is reduced to zero percent for tax years beginning after Dec. 31, 2007.

Finally, under the act, dividends received by an individual shareholder from domestic corporations are taxed at the same rates that apply to net capital gains. Thus, the maximum rate on dividends is only 15 percent. The 15 percent rate applies in tax years 2003 through 2008.

Both of these provisions are expected to spur investments and new jobs to the economy.

Conclusion

The new tax act contains something for nearly everyone. Take this opportunity to find the nuggets that are there for you.

Sharon Stanley is a representative of The Prudential Insurance Co. of America in Cape Girardeau. (334-2603 )