Small Business Taxes & ManagementTM--Copyright 2003, A/N Group, Inc.
The new law can be broken down into three sections. The first provides tax relief for individuals, including reduction of the marriage penalty, a reduction in individual income tax rates, and minimum tax relief. The second provides growth incentives for business in the form of an increase in the bonus depreciation from 30% to 50% and increased expensing of assets. The third section generally lowers the tax rate on dividends and capital gains to 5% (from 10%) for taxpayers in the 15% bracket and to 15% (from 20%) for those taxpayers in higher brackets.
Acceleration of Previously Enacted Tax Reductions
The new law accelerates a number of provisions enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 that were designed to reduce the tax burden of individuals. Many of the provisions in the new law expire, some at the end of two years. While many of these changes could be extended, at the present time you've got to assume they won't be.
Increase in Child Tax Credit
The child tax credit was scheduled to increase from $600 to $1,000 beginning in 2005. (The child tax credit applies to each child under the age of 17 at the end of the taxable year for which the credit is claimed. The credit is phased out for taxpayers with AGI above $110,000 (married filing joint; $75,000 for single individuals). The new law increases the credit to $1,000 for taxable years 2003 and 2004. In addition, the increased portion of the credit ($400) is to be refunded in advance (similar to the tax reduction in 2001) based on a taxpayer's 2002 return. The refund is to be made as soon as possible, but in no event will checks be mailed after December 31, 2003. The IRS has just announced that it will begin mailing refund checks at the end of July.
Expansion of 15% Tax Rate Bracket for Married Taxpayers
In an attempt to reduce the marriage penalty, the Economic Growth and Tax Relief Reconciliation Act of 2001 would change the 15% tax bracket for married taxpayers who file joint returns. It would do so by making the ceiling for the 15% bracket for married taxpayers filing jointly twice that of the 15% bracket for individuals. Thus, for 2003, the 15% rate bracket for married taxpayers will begin at $14,000 and extend to $56,800 (up from the original $47,450).
This change will be effective for calendar tax years 2003 and 2004. In 2005 the upper threshold of the 15% bracket will decline to 180% of that for an individual taxpayer.
Tax Tip--While the tax benefit will depend on your income, this change could save some taxpayers as much as $935 in 2003. While the change was intended to benefit two-earner couples, it will benefit all taxpayers filing married, joint.
Increase in Standard Deduction for Married Taxpayers
The second leg of the marriage penalty reduction was the increase in the standard deduction for married couples filing jointly to twice the amount of the standard deduction for single taxpayers. Again, this provision has been accelerated to 2003 and 2004. Thus, for 2003 the standard deduction will be $9,500 instead of $7,950. The amount will decline to 180% of the standard deduction for single individuals beginning in 2005.
Tax Tip--The additional amount will probably mean that more taxpayers will be taking the standard deduction instead of itemizing. If you anticipate being near the $9,500 amount, or just slightly over in 2003, you might want to consider bunching deductions in 2003 or 2004 to make the most out of the standard and itemized deduction.
Acceleration of 10% Individual Income Tax Rate Bracket Expansion
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 the 10% bracket was to expand from $12,000 for married taxpayers filing jointly and $6,000 for individuals and married taxpayers filing separately to $14,000 and $7,000. The $10,000 ceiling for heads of households is unchanged. The new thresholds will be in effect for years 2003 through 2005. The thresholds are adjusted for inflation beginning in 2004.
Don't call the contractor to start work on the swimming pool. Individual taxpayers will save only $50; those filing married joint will save only $100 in 2003.
Reduction in Individual Income Tax Rates
This is the big one for most taxpayers. The new law accelerates the reduction in the rates that were scheduled to take effect in later years to 2003. The rates for this year were scheduled to be 10%, 15%, 27%, 30%, 35%, and 38.6%. Under the new law the rates for all of 2003 will be 10%, 15%, 25%, 28%, 33%, and 35%. The savings could be substantial. For example, this change alone could result in savings of some $1,300 for married taxpayers filing jointly and $800 for individual taxpayers having income of just $115,000 (married, joint) or $70,000 (single).
We've calculated the new breakpoints and taxes for single individuals, married couples filing jointly, and heads of households and reproduced them at the end of this section.
Tax Tip--You may want to rethink your estimated tax payments and reduce them for the remainder of the year. How much depends on how affected you are by the changes above. Clearly, some taxpayers will benefit more than others. Higher income taxpayers, will see substantial savings. When doing the computations, don't forget to take into account the changes in the rules for dividends and capital gains. Caution. The lowered ordinary income rates mean you stand a greater chance of getting hit with the alternative minimum tax. Don't forget to factor this into your calculations.
Tax Tip--The reduction in individual rates without a corresponding drop in corporate rates means doing business as an S corporation, LLC or partnership is more attractive than before. On the other hand, the lower tax rate on capital gains and dividends and certain other law changes (to be discussed in the third part of our review of the new law) makes some of the disadvantages of regular corporations less onerous. It's time to once again evaluate the proper entity to use to do business.
Tax Tip--The lower tax rates mean that there's a better chance of getting hit with the alternative minimum tax. That's because the rates on that tax are 26% and 28%, the same as in prior years. This year, even more than in recent years, you've got to review your tax situation before the end of the year. There are ways to minimize the impact of the alternative minimum tax, but you've got to plan for it. Then, be careful to calculate the tax when preparing your return next year.
Tax Tip--The lower tax rates cut both ways. While you'll pay less tax on any earnings, deductions aren't worth as much. For example, under the old 30% bracket, a $100 deduction would save you $30 in tax. Now, under the 28% bracket, that same deduction is worth only $28.
Tax Tip--Employers will have to change their withholdings on employees to reflect the new law. The IRS has already published new withholding tables for computer use. Tables that allow you to use wage bracket withholding will be published by May 30.
Alternative Minimum Tax Relief
The new law provides only a little relief from the alternative minimum tax. For 2003 and 2004 the exemption amount for married couples filing jointly increases to $58,000 from $49,000. For single taxpayers the exemption goes to $40,250 from $35,750. The increases are small and the exemption is phased out with higher income. On balance, the increase is unlikely to offset the effect of the lower regular income tax rates on the alternative minimum tax.
Tax Rate Schedules for Individuals--2003
Taxable income: Tax: Over But not over Tax +% On amount over $ 0 $ 7,000 $ 0.00 10 $ 0 7,000 28,400 700.00 15 7,000 28,400 68,800 3,910.00 25 28,400 68,800 143,500 14,010.00 28 68,800 143,500 311,950 34,926.00 33 143,500 311,950 ....... 90,514.50 35 311,950Married Individuals Filing Joint
Taxable income: Tax: Over But not over Tax +% On amount over $ 0 $ 14,000 $ 0.00 10 $ 0 14,000 56,800 1,400.00 15 12,000 56,800 114,650 7,820.00 25 56,800 114,650 174,700 22,282.50 28 114,650 174,700 311,950 39,096.50 33 174,700 311,950 ....... 84,389.00 35 311,950Heads Of Households
Taxable income: Tax: Over But not over Tax +% On amount over $ 0 $ 10,000 $ 0.00 10 $ 0 10,000 38,050 1,000.00 15 10,000 38,050 98,250 5,207.50 25 38,050 98,250 159,100 20,257.50 28 98,250 159,100 311,950 37,295.50 33 159,100 311,950 ....... 87,736.00 35 311,950
Copyright 2003 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536
--Last Update 05/29/03