What is the 2003 Federal Tax Act All About?

The Jobs Growth and Tax Relief Reconciliation Act of 2003 is short as tax acts go, but it has many powerful tax relief provisions. Most taxpayers will be affected in some way. Most will feel the effects of generally lower tax rates. Some taxpayers will be affected by other provisions as well. Following is a short synopsis of the changes found in the act.

General Tax Rate Reductions

The top federal tax rate will be 35% in 2003, down from 38.6% in 2002. Other tax brackets and the amount of income subject to the 10% tax rate are reduced as well. In 2003, all things considered, most taxpayers will benefit at least from the reduction in tax rates as well as an expansion of the 10% tax bracket. By way of example, a single taxpayer with taxable income of $100,000 will save about $1,500 because of the reductions in the 2003 tax rates.

Capital Gain And Dividend Tax Rate Reductions

In 2003, long term capital gains and most dividends will be taxed at 5% for low income taxpayers and 15% for all other taxpayers. For top bracket taxpayers, this means a savings as compared to 2002 of 5% for long term capital gains and 23.6% for dividends. For many, this is a good time to consider selling greatly appreciated stocks and real estate as well as investing in stocks with high dividend yields.

Expanded First Year Write-Offs of Business Assets

Businesses that invest less than $400,000 in depreciable personal property during 2003 will be able to write off under section 179 the first $100,000 invested. In addition, all taxpayers can take 50% bonus depreciation. The balance invested, after subtracting section 179 and bonus depreciation write-offs, is subject to regular depreciation. By way of example, a business investing $250,000 in machinery during 2003 would be able to take the following write-offs in 2003:

Tax Relief For Married Taxpayers

In 2003, for married couples filing jointly, the amount of income taxed at the 15% rate increased by $8,100 from $34,700 to $42,800. Before the 2003 Act, that income would have been taxed at 27%. Thus, married couples filing jointly with taxable income exceeding $56,800 will save almost $1,000 in 2003 as compared to 2002 because of the expansion of the 15% tax bracket alone. Overall, a married couple filing jointly with no children, no long term capital gains or dividends, and taxable income of $100,000, will save almost $2,200 from lower overall tax brackets and the expansion of the 15% tax bracket.

Increase In Child Tax Credit

For 2003, the child tax credit is increased by $400 to $1,000, but only for taxpayers whose modified adjusted gross income does not exceed $110,000 for married couples filing jointly, $55,000 for married couples filing separately and $75,000 for single taxpayers. Over these amounts the credit is phased out at the rate of $50 for each $1,000 of taxable income.

Some Alternative Minimum Tax Relief

For 2003, the alternative minimum tax exemption is increased by $9,000 for joint filing married couples and $4,500 for single taxpayers. For joint filing married couples subject to the alternative minimum tax this means a potential savings of approximately $2,400 and for single taxpayers this means a potential savings of approximately $1,200.

The Alternative Minimum Tax is Still There

Over the years, the alternative minimum tax has affected more and more taxpayers. Particularly vulnerable are taxpayers with large amounts of employee business expenses, investment advisory fees, state income taxes and real estate taxes. Under certain circumstances, the alternative minimum tax may partly mitigate some of the tax benefits described above.

Action Alert

It is always a good idea to plan ahead, but when there are tax changes of the magnitude that were adopted for 2003, it is even more important. Among other things, taxpayers should consider:

June 30, 2003
Evanston, Illinois

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