HOW AM I AFFECTED BY THE NEW TAX
LAWS?
I'm sure you know about the passage of the Jobs and
Growth Tax Relief Reconciliation Act of 2003, and have heard of the political controversy
it has stirred up. Naturally, your first question is "How am I affected by this new
law?" The purpose of this letter is to highlight how the new law will cut your taxes
for 2003 and give you an idea of future changes.
Businesses:
There are two major tax law changes for Businesses and Corporations. These are:
- Vastly liberalized expensing election for
property placed in service in tax years 2003-2005. The maximum annual expensing amount is
now $100,000, up from $25,000. This amount is reduced by the amount by which the cost of
qualifying property placed in service during the tax year exceeds a specified dollar
level. This level has been increased to $400,000 from $200,000. Off-the-shelf computer
software will become eligible for expensing (currently it is not).
- Increased bonus first-year depreciation.
Guidelines to determine if property qualifies for 30% and 50% bonus first-year
depreciation have been changed, and taxpayers may now elect on a class-by-class basis to
claim 30% instead of 50%, or elect not to claim bonus first-year depreciation at all.
Individuals:
One major component of the law affects how your income is taxed. For regular tax purposes,
the first "slice" of your taxable income is taxed at 10%, and additional slices
are taxed at progressively higher rates until you reach the maximum. The various
"slices" and their corresponding rates are commonly referred to as the "tax
brackets." All of the following tax rate cuts apply retroactively to Jan. 1, 2003.
- Single, or Married Filing Separately: the
first $7,000 (instead of $6,000) of your taxable income will be taxed at 10%, the lowest
rate. Because the extra $1,000 was taxed at 15% under prior law, you save a maximum of
$50.
- Married Filing Joint: the first $14,000
(instead of $12,000) of your taxable income will be taxed at 10%. Because the extra $2,000
was taxed at 15% under prior law, you save a maximum of $100. More of your additional
income will be taxed at 15% (instead of falling in the next bracket and being taxed at
25%).
- The new law reduces all tax rates above 15% for all
individuals (as well as estates and trusts). The new tax rates are: 25% (instead of 27%);
28% (instead of 30%); 33% (instead of 35%); and 35% (instead of 38.6%).
How much will the tax rate changes save you? The answer
depends on your taxable income and your filing status. For example:
…If you are single with $60,000 of taxable income for 2003, your tax bill will be
$682 less. If your taxable income is $120,000, you save $1,882.
…If you are married filing joint and have $60,000 of taxable income for 2003, your
tax bill will be $1,286 less. If your taxable income is $120,000, you will save $2,486.
To compute your personalized savings for the next seven
years, use this link.
TAX CALCULATOR http://www.quicken.com/taxes/taxrelief/estimator/taxcuts/taxcenter2001
Wage earners will get a larger paycheck as a result of
changes for individuals. Payroll withholding should reflect the new law as soon as the new
withholding tables are put into effect.
The new law also provides for:
- A bigger standard deduction for joint filers.
The basic standard deduction for 2003 is $9500, a $1,550 increase. There is no increase in
the additional standard deduction amounts for elderly or blind persons.
- Reduced taxes on capital gains and dividends.
For sales and exchanges (and installment payments received) after May 5, 2003, gains on
most capital assets held longer than one year will be taxed a maximum rate of 15% (instead
of 20%). The minimum tax rate on capital gains drops to 5% (instead of 10%), or 15% (if it
is considered ordinary income, such as a salary). In addition, dividends received in 2003
from a domestic corporation (or limited "qualified foreign corporations") are
taxed at the same rates that apply to capital gains (either 15% or 5%).
- A boosted child tax credit, partially refunded for
2003. The child tax credit will increase $400 for 2003 to $1,000 per qualifying
child. The increased amount of the child tax credit will be paid in advance beginning in
mid-July. This year, a qualifying family with one child will receive an advance payment
check from the Treasury for up to $400, or $800 for two children. The amount of advance
payments will be based on a person's 2002 filing status and income, as well as the number
of children claimed on the 2002 tax return who will still be under age 17 in 2003. The new
law does not change the income levels at which the child credit starts to phase out
($75,000 for singles, $110,000 for married couples, and $55,000 for married filing
separately).
Unfortunately, to meet budget constraints many of the tax
breaks in the new law are not permanent. For example, the new tax breaks for married
filing jointly will be watered down after 2004, and the maximum child tax credit will drop
after 2004. The reduced tax rates for capital gains and dividends will only last through
the end of 2008. This will make it somewhat difficult for all of us to do long-term
planning.
Your first step should be to examine the new law's immediate effect on you, your family,
and your investments, then come up with a game plan for the future. If you need any
further clarification, please feel free to call our office.
Sincerely,
Jean DeKraker, CPA, PC
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