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Jobs
and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)
by: James
Lange, CPA, JD
On May 28, 2003,
President Bush signed the Jobs and Growth Tax Relief Reconciliation
Act of 2003 (JGTRRA).
The act includes:
- Reduced income tax rates
- Reduced tax on qualifying dividends
- Reduced capital gains tax
- Increased child care credit
- Mild alternative minimum tax relief
- Faster depreciation for small business
- Marriage penalty relief
- Revised tax brackets resulting in
less tax
- A whole lot more
The Bottom Line
For most of my clients,
the most important changes will be the changes in the income tax
rates and the income tax brackets. Of less importance will
be the break on tax dividends and capital gains because most of
my clients have the majority of their investments inside IRAs and
retirement plans. The current legislation does not have any
direct impact on IRAs and retirement plans. Presumably, the
impact will be felt in the increased value of your stocks, even
if still in your IRA or retirement plan.
For your convenience,
we will be sending out an update of our Tax Reference Card with
all the new income tax rates and tax brackets. You might want to
recalculate your anticipated liability under JGTRRA and consider
lowering your withholdings or estimated tax payments.
You should, however, consider that there is also an adjustment to
the withholding tables that will reduce the amount of tax withheld.
We start with logical
Action Points in response to the new legislation, move to the big
picture and conclude with a short description of the changes. The
source for much of this information comes from: CCH Tax Briefings,
Special Report Tax 2003.
I also want to alert
you to a special radio broadcast at 7:30 p.m., Eastern Standard
Time, June 11, 2003 on KQV 1410 AM (in the Pittsburgh area). I will
be the guest of Ron Weiss on the
Arthur Lestrange Financial Forum. KQV also streams its
broadcasts on the web at
www.kqv.com. There are more particulars on the broadcast at
the end of this newsletter.
Action Points
Charlie Smith, Chief
Investment Officer of Fort Pitt Capital Group, comments on the impact
of JGTRRA from an investment viewpoint. “Everything in the
investment world happens at the margin. This is a marginal
change, not a sea change. At the margin, it makes stocks more
attractive than bonds. We are not at the point, however, where
the change in the tax law should drive the investment decision.”
Taxpayers should
recalculate their anticipated liability with the new laws and consider
lowering their withholdings or estimated tax payments.
It is time to get
married! There are no more excuses—you've waited long enough
to avoid the “marriage penalty.” The change in the tax brackets
and the increase in itemized deductions effectively eliminate the
marriage penalty.
Retirement plan,
IRA and Roth IRAs owners: stay the course. We have run
numbers and determined, even with the reduced taxes and the special
dividend rate reduction, our time-honored advice to pay taxes
later continues to apply. The most important exception
to this rule stands as well: the Roth IRA and the Roth IRA conversion.
If you are currently taking distributions, you will enjoy some of
the benefits of this tax act.
Traditional “C”
corporation owners have even a higher incentive to switch to LLC
or Subchapter S status.
Profitable small
businesses owners can enjoy greater depreciation benefits and if
needed, should consider purchasing qualifying equipment.
The real truth is
the resulting tax code now has constantly changing income tax rates,
income tax brackets, and other shifting provisions. These
constant changes along with the uncertainty of the sunset provisions
create massive uncertainty, and seriously hinder everyone's ability
to do effective planning.
The Big Picture
This was one of the
most contentious pieces of tax legislation ever passed. The
House voted 231-200 in favor, the Senate voted 51-50 with the Vice
President casting the tie-breaking vote. Both the House and
the Senate voted primarily on party lines. The Committee that
hammered out the differences between the House and Senate came up
with a bill that was signed by President Bush on May 28th.
If you are one of
fortunate 184,000 taxpayers making more than $1M per year, you can
expect to see an average tax savings of $93,500 in 2003. If
you are one of roughly 8,000,000 low and middle-income taxpayers,
you will receive no benefits from the new legislation. Half
of all households in the nation either will receive no tax cut or
will get a tax cut of $100 or less.
The enormity of the
change is difficult to comprehend. The $350 billion dollar
number is misleading. Though billed as a $350 billion
dollar cut, its true impact is far greater due to the “sunset provisions.”
The technique, also employed widely under EGTRRA (Economic Growth
Tax Relief Reconciliation Act of 2001), the first major tax cut
signed by President Bush, is to make sweeping changes, but make
the changes temporary. At the end of the term, the “sunset
provisions” return the law to where it was before the changes.
This sunset provision allows the master number-crunchers to cap
the tax cut, while knowing that once the public becomes accustomed
to the changes, future Congresses will find it difficult to fail
to extend the many benefits of this bill. The total costs
of the two most recent tax law acts, EGTRRA and JGTRRA, if extended
beyond 2010, will be between $430 billion and $2.7 trillion by the
year 2013, depending on which source you believe.
JGTRRA is certainly
not the first legislation to employ the sunset provision gimmick.
Nonetheless, depending on which figures you believe and the specific
way you define the terms, the magnitude of gimmicks in this legislation
and President Bush's earlier tax cut (EGTRRA) exceeds that of prior
administrations by a factor of 20 or more. One source for
this newsletter, Center on Budget and Policy Priorities found at
www.cbpp.org, a group that obviously doesn't support the legislation
as written. Opposing viewpoints are found at the Republican
National Committee's web site,
www.rnc.org.
Among the winners
are tax attorneys at the corporate level and income tax preparers
at the individual level, courtesy of the enormous complications
inherent in the JGTRRA. Producers of tax preparation software
such as Turbo Tax® or Tax Cuts® should also get a boost as it will
be harder and harder for individual self preparers to complete their
tax return without the aid of computer software. Existing
self-preparers using computer software may expect additional complications,
but many of the changes will be “seamless,” and you will still be
able to prepare your return.
Short Descriptions
of the Changes
Capital Gains Reductions
Capital gains rates
fall from 20% to15% for higher income earners for qualifying property
sold between May 6, 2003 through December 31, 2007.
For lower income
taxpayers, the current 10% rate falls to 5%. In 2008, there
will be a zero percent capital gains for lower income taxpayers.
Then, on January 1, 2009, the sunset provisions spring to life (maybe)
and capital gains taxes will increase to prior levels.
The big difference
between the highest tax rate of 35% and the highest capital gains
rate of 15% makes tax planning even more important. The five-year
holding period created by EGTRRA is effectively repealed.
Reduced Taxation on Dividends
Dividend income
from a qualifying corporation will be taxed at a maximum rate of
15% for most taxpayers. Lower income individuals will pay
tax on dividends at 5%. Many dividends will not qualify for
the lower 15% rate. You can expect to see controversy and
litigation over which dividends will qualify for special treatment
and which will not.
Small Business Provisions
Profitable business
owners should plan for greater equipment purchases if that is the
right move for your business. Section 179 property, specific
property for which a business can purchase and depreciate 100% of
the cost in the first year, increases from $25,000 to $100,000.
In addition bonus depreciation will increase from 30% to 50% for
qualifying property. Please note that only businesses purchasing
more than $25,000 of qualifying equipment will receive any additional
depreciation benefits.
Child Tax Credit
The new law boosts the credit from
$600 to $1,000 per child for 2003 and 2004 for certain taxpayers.
From 2005—2009, the credit will be $700, but then back to $1,000
in 2010. Based on your 2002 return, the IRS is planning on
sending checks to taxpayers with children. The check will
be $400 per eligible child.
Please note that
even though the law increases the credit from $600 to $1,000, the
checks qualifying families can expect to receive is for $400.
Qualifying taxpayers can request the additional $600 when they file
their return. In order to qualify for the credit, taxpayers
must fall within certain income guidelines. These guidelines
were fiercely disputed and are the subject of the front-page story
of the New York Times. The New York Times
and the Center for Policy and Budget Priorities claimed that the
income limitations on the new tax act unfairly excluded working
poor taxpayers with children. The Wall Street Journal's
editorial page disputed the claim.
Just yesterday, June
5, 2003, (after I thought this e-mail newsletter was done), the
Senate responded to widespread criticism by passing a new resolution
changing the income limitations on the child tax credit.
I will describe both the law as it stands today and provide a brief
summary of the Senate resolution. It should be noted, however,
that even though the Senate passed the new resolution 94-2, the
Senate resolution is not law because it did not pass the House,
nor is it signed by the President. What is relatively certain
is that we will see additional changes in the limitations of which
families will qualify for the child tax credit. The proposed
changes increases eligibility for the child tax credit both on the
low and high income ranges.
First, the law as
signed by President Bush is the current law.
Before we get into
the income limitations, let's do an easy example where the income
limitation doesn't apply.
A married couple
with income of $60,000 has two children. Under pre JGTRRA
law, the credit would be calculated as follows: 2 children
times $600 or $1,200. Under post JGTRRA, the couple would
receive the additional $400 credit per child for a total of $2,000.
The IRS will mail this couple a check for $800 and they can claim
the additional $1,200 when they file their tax return, IRS Form
1040.
The child tax credit
for married filing jointly is currently limited to 10% of your earned
income above $10,500 or $600, whichever is lower. Thus many
minimum wage earners will not enjoy any increase in the increased
child tax credit and minimal, if any, income tax relief.
A married couple with earned income
of $20,000 has two children. $20,000-$10,500=$9,500 times
10% = $950 or $475 per child. The limitation is the lower
of the $475 or $600. Both under pre and post JGTRRA, the couple
falls short of the limitation of $600 per child. Thus the
current change in the tax law expanding the credit from $600 to
$1,000 doesn't help or hurt this couple.
The law as proposed in the Senate resolution
would increase the limitation to 15% of your earned income in excess
of $10,500 or $1,000 whichever is lower. New calculation:
$20,000-$10,500=$9,500 times 15% = $1,425. The new proposed
limitation of $1,425 would give this couple an additional $475 tax
break.
The Senate resolution also increases
the income eligibility limit for married individuals on the upper
income limits.
The income eligibility limit for married
couples will remain at $110,000 until 2008 when the limit will increase
to $115,000. The limit will then remain at $115,000 until
2010 when the limit will increase to $150,000. For a detailed
analysis of the phase-outs and political commentary on how even
the Senate resolution is regressive, please see
www.cbpp.org.
Marriage Penalty
Income tax rates
are decreased for married couples. The standard deduction
for married taxpayers is increased from $7,950 to $9,500.
For most of our readers, this change will not have any impact because
you are currently itemizing your deductions. As with most
of the provisions, this relief is only temporary. From a tax
standpoint, it is probably wise for those individuals “living together”
to get married now—but consider getting divorced in 2005, depending
on how much money you make and what happens with the sunset provisions.
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