Jobs and Growth Tax Relief Reconciliation Act of 2003
On May 28, 2003, President Bush signed into law the "Jobs and Growth Tax Relief Reconciliation Act of 2003" (the "Act"). Although not as large as the $726 billion tax cut originally proposed by the Bush Administration, the $350 billion Act is still the third largest tax cut in history and contains many aspects and variations of the President's original proposal. The Bush Administration and Congress are hopeful that the Act will provide a much needed stimulus to capital investments by businesses and will further boost the struggling economy by putting more income back into the hands of individuals.
Tax Breaks for Businesses
- "Bonus" Depreciation & Increased First-Year Small Business Expensing.
For purposes of bonus depreciation, "qualified property" generally consists of new depreciable, tangible personal property (including certain computer software and leasehold improvements to non-residential real property) that has a recovery period for depreciation purposes of 20 years or less and with which the original use of the property commenced with the taxpayer after May 5, 2003 and before January 1, 2005. Property does not qualify for 50 percent bonus depreciation if the property has been repaired or reconstructed or if a binding written sales contract to purchase the property was in effect prior to May 6, 2003. In order to conform the so-called "luxury automobile" depreciation limits to the new 50 percent bonus depreciation, the Act raises the bonus depreciation amount that may be deducted for certain business automobiles to $7,650 (plus the normal depreciation amount). Luxury SUVs, trucks and other automobiles weighing 6,000 pounds or more are eligible for the 50 percent bonus depreciation, provided that the business use of the automobile is greater than 50 percent of its total use. Bonus depreciation does not apply where the business use of the automobile is not greater than 50 percent of its total use.
Observations: The Act dramatically increases the bonus depreciation and business expense deductions for businesses, especially small business taxpayers. The increased Code Section 179 expense deduction encourages taxpayers to maximize their tax savings by hand-picking qualified property against which to apply the $100,000 first-year expense deduction. In choosing such property, taxpayers should apply the expense deduction against qualified property with the longest recovery period in order to accelerate to the greatest extent possible the cost recovery of such property.
- Corporate Estimated Taxes
Individual Income Tax Relief
- Reduction of Marginal Income Tax Rates
Observations: Since the marginal income tax rate reductions are retroactive to January 1, 2003, wage earners are encouraged to reduce (by filing with their employers a new Form W-4) the amounts that they have withheld from their paychecks to best take into account the prospective and retroactive nature of the rate reductions. Sole proprietors and taxpayers conducting business through pass-through entities such as partnerships, LLCs and S Corporations will also benefit from the marginal rate reductions. Taxpayers making estimated tax payments for 2003 may wish to adjust the amount of such payments to take into account the reduced marginal income tax rates, as well as the reduced dividend and long-term capital gain rates (discussed below).
- Alternative Minimum Tax ("AMT") Relief
- Marriage Penalty Relief
For 2003 and 2004, the Act increases the amount of the standard deduction for married taxpayers filing jointly ($9,500 for 2003) to twice the standard deduction amount of single taxpayers. Beginning in 2005, the standard deduction for married taxpayers filing jointly will return to its pre-Act amount of 174 percent of the standard deduction for single taxpayers and will then gradually rise to double the amount for single taxpayers by 2009.
The Act also expands the maximum taxable income level for the 15 percent tax bracket for married taxpayers filing joint returns to twice the width of the bracket for single taxpayers for 2003 and 2004. Beginning in 2005, the maximum taxable income level for the 15 percent tax bracket will revert to its pre-Act amount of 180 percent of the level for single taxpayers.
- Accelerated Increase in Child Tax Credit
Observations: The IRS will begin mailing the advance payments in July 2003 and hopes to have all advance payments distributed to qualifying taxpayers no later than October 2003 (with no advance payments being made after December 31, 2003). Taxpayers who receive an advance payment will reduce the child tax credit taken on their 2003 federal income tax return by the amount of the advance payment received. Taxpayers to whom a qualifying child is born during 2003 will be entitled to the full $1,000 child tax credit for 2003 to the extent that they so qualify. The Act did not change the income levels at which the child tax credit starts to phase-out ($75,000 for unmarried taxpayers, $110,000 for married taxpayers filing a joint return and $55,000 for married taxpayers filing separate returns).
The House and Senate has each passed a bill that would expand eligibility for the new $1,000 child tax credit to low-income taxpayers, although the bills differ as to whether low-income taxpayers would receive advance payment checks. Under current law, many low-income families pay too little in taxes to qualify for the child tax credit. The bills would also raise the phase-out amount for married taxpayers filing joint returns from $110,000 to $150,000 ($75,000 for married taxpayers filing joint returns), although when such an increase would occur varies between the current House and Senate bills. The two bills also differ with respect to the sources of funding for the increased scope of the child tax credit.
Reduction of Long-Term Capital Gains & Dividends Rates
For purposes of the Act, "qualified dividend income" includes dividends received by individuals, trusts, or estates from (i) domestic corporations, (ii) "qualified foreign corporations," or (iii) non-qualified foreign corporations whose stock is traded on an established U.S. equities market. A "qualified foreign corporation" is an entity incorporated in any U.S. possession and generally includes any entity incorporated in a country with which the United States has entered into a comprehensive income tax treaty. A "qualified foreign corporation" does not include a foreign personal holding company, a foreign investment company, or a passive foreign investment company (a "PFIC"). The Act also provides that most dividends received from real estate investment trusts ("REITs") are not eligible for the 15 percent tax rate and will be taxed at the taxpayer's marginal income tax rate (this is the case as the income of a REITs is generally not subject to corporate taxation). The accumulated earnings tax under Code Section 531 and the personal holding company tax under Code Section 541 are reduced under the Act to 15 percent of accumulated taxable income and undistributed personal holding company income, respectively. The Treasury department is expected to issue guidance regarding the definitions of "qualified dividend income" and "qualified foreign corporation" for purposes of the Act.
Observations: With the spread between the maximum marginal tax rate for ordinary income (35 percent) and the tax rate for long-term capital gains and qualifying dividends (15 percent) now being 20 percent, recognizing long-term capital gains or dividend income rather than ordinary income becomes even more valuable to taxpayers in higher tax brackets. Therefore, taxpayers may want to reconsider the current allocation of their portfolio assets between interest bearing assets such as bonds and CDs and dividend paying stocks. For example, unless the interest rate on tax-exempt municipal bonds rise to take into effect the reduced tax on dividends, tax-exempt municipal bonds may prove less appealing to investors, although investors residing in states with high personal income tax rates may still favor tax-exempt municipal bonds over dividend paying equities. Taxpayers may also want to consider adjusting the assets held both inside and outside of their tax-exempt or tax-deferred retirement plans.
- Temporary State Fiscal Relief Fund