- 2003 Tax Act Provides Breaks For Individuals, Small Businesses and Corporations
- October 23, 2003
- Law Firm: Meyer, Unkovic & Scott LLP - Pittsburgh Office
On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Act"). The 2003 Act represents one of the largest tax cuts in history, providing tax breaks for individuals, corporations and small businesses. A few of the most significant provisions are described below.
Individual Tax Provisions
Acceleration of Rate Reductions
The 2003 Act accelerates the reduction in individual income tax rates previously scheduled to take effect after 2003. Now, for 2003, the tax rates are 25%, 28%, 33% and 35% (down from 27%, 30%, 35% and 38.6% respectively).
The 2003 Act also accelerates the increase in the taxable income levels in the 10% bracket, so that in 2003 and 2004 only, the 10% bracket will be applied to the first $7,000 of taxable income for single individuals and married taxpayers filing separately, and $14,000 for married taxpayers filing joint returns. The 15% bracket is also expanding for married taxpayers to double the 15% bracket for single taxpayers.
Elimination of Marriage Tax Penalty
For 2003 and 2004, the 2003 Act immediately increases the size of the standard deduction for married couples to double (200%) the standard deduction for single taxpayers. In 2005, the standard deduction for married taxpayers will fall to 174% of the standard deduction for single taxpayers, but it is scheduled to increase to double the size of standard deduction by 2009.
Child Tax Credit
The 2003 Act temporarily accelerates the increase in the child tax credit previously scheduled to be phased in between 2005 and 2010. The amount of the credit is increased from $600 to $1,000 for 2003 and 2004. Subject to phase-out/elimination as adjusted gross income rises, taxpayers are generally eligible for the credit for each dependent child under age 17.
Increase in Alternative Minimum Tax ("AMT") Exemption
In an effort to ensure that the benefits provided under the 2003 Act are not offset by the AMT, the AMT exemption amount is increased for 2003 and 2004 to $58,000 (up from $49,000) for married taxpayers and to $40,250 (up from $35,750) for single taxpayers. Nevertheless, taxpayers who have substantial dividend and/or capital gain income may be subject to the AMT, thereby reducing the benefits set forth in the following paragraph.
Reduction in Rates on Long Term Capital Gains and Dividends
The 20% rate on long-term capital gains is reduced to 15% for 2003 through 2008 for most taxpayers, and the 10% rate on long-term capital gains is reduced to 5% for 2003 through 2007 and 0% in 2008 for lower income taxpayers. The new rates expire at the end of 2008. This reduced rate does not apply to the sale of collectibles, which remains at 28%, or real estate depreciation recapture (25%).
Qualifying dividend income received by an individual shareholder of a domestic or qualified foreign corporation will be taxed at a rate of 15% for most taxpayers for 2003 through 2008 and 5% for lower income individuals for 2003 through 2007 and 0% for 2008. The new rates expire at the end of 2008. Owners of closely-held C corporations may be able to take advantage of this reduced rate, but careful planning is required. S corporations with accumulated earnings and profits attributable to prior C corporation years may want to consider making dividend distributions to its shareholders now in order take advantage of the lower dividend rates.
Small Business and Corporate Tax Provisions
Increase in the Section 179 Deduction
Business taxpayers previously could elect to immediately deduct up to $25,000 of qualified property for the year such property was placed in service. The 2003 Act increases the amount of the deduction to $100,000, subject to certain limitations.
Increase in Bonus Depreciation
The 2003 Act also increases the first year bonus depreciation deduction from 30% to 50% for new property acquired and placed in service after May 5, 2003 and before January 1, 2005. This may be combined with the Section 179 expensing election.
Reduction in Accumulated Earnings Tax Rate
The 2003 Act reduces the accumulated earnings tax rate to 15% for taxable years beginning after December 31, 2002.
The 2003 Act introduces a host of new rules which, in many cases, accelerate currently existing benefits under the tax code and in other cases, create a number of new phased-in/phased-out benefits. While the rate reductions are obviously favorable, complex planning may be required in order to benefit from the breaks.