ORIGINALLY WRITTEN JANET HAMOUS
Christmas came early in 2003 for many taxpayers who reaped the benefits of the Jobs and Growth Tax Relief Reconciliation Act of 2003 signed into law last May.
More benefits await taxpayers as they file their 2003 returns.
The gift basket included accelerated tax-rate cuts, an increased child tax credit with an immediate cash advance for eligible taxpayers, dividend and capital gains tax reductions and marriage penalty relief-all designed to stimulate the economy by placing more dollars in consumers’ hands.
Several of the changes were actually passed in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act and were scheduled to be phased in gradually through 2010.
The 2003 Act accelerated the implementation of those changes and moved them into 2003. It also added some new provisions created specifically to jump start the economy.
The act provided for an immediate reduction in federal income tax rates.
Rates above 15 percent generally fell about two percentage points. At the beginning of 2003, tax rates were 10 percent, 15 percent, 27 percent, 30 percent, 35 percent or 38.6 percent depending on the taxpayer’s “tax bracket.”
Following implementation of the Act, those rates changed to 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent.
The new law also provided for an immediate expansion of the 10 percent tax bracket. This change affected all taxpayers regardless of tax bracket since every taxpayer shares in the rate cuts in the brackets lower than his or her own.
Following the Act’s passage, employers received revised federal withholding tables to use in figuring payroll taxes. But since the changes in the tax rates were retroactive to Jan. 1, 2003, taxpayers who did not adjust the amount they had withheld from their paycheck may find they over-withheld tax for the first several months of the year before the new tables were issued.
When they complete their 2003 tax returns, those taxpayers may see a refund or a refund larger than they would have received without the reduction in rates.
Increased child tax credit
Under the old tax law, eligible taxpayers could claim a tax credit of up to $600 for each qualified dependent child under age 17. The credit was scheduled to increase in steps until reaching $1,000 per child in 2010.
The 2003 Act put the $1,000 credit in place for 2003 and 2004. It also provided an immediate benefit for taxpayers who claimed the child tax credit on their 2002 returns.
Last summer, eligible taxpayers received advances of up to $400 per child.
“Those who were able to get the full child tax credit last year should have received a $400 advance refund,” said Bryce Wichert, CPA with Adams, Brown, Beran and Ball in Hillsboro.
The amount of the advance was calculated from information on the taxpayer’s 2002 return.
Wichert said taxpayers will receive the remaining child tax credit when they file their 2003 return.
“Those who received the full $400 refund will only see the $600,” he said. “Those who were eligible but didn’t receive it, or anybody who had new children last year, will get the full $1,000 credit.”
Marriage penalty relief
Historically, married taxpayers have paid more taxes as a couple than they would have paid as unmarried individuals. Remedies for this “marriage penalty” were slated to go into effect in 2005, but the 2003 Act moved up the effective date.
When married taxpayers do their taxes for 2003, they will see that the standard deduction for joint filers has risen to twice the standard deduction for single filers.
“Basically, they doubled the single standard deduction rate so now the married filing joint is at $9,500,” Wichert said. “Last year it was somewhere between $7,000 and $8,000.”
Because of the change, some married couples may find they are better off using the standard deduction than they are itemizing deductions for 2003.
The 2003 Act also expanded the 15 percent tax bracket for joint returns to twice the size of the 15 percent bracket for single returns.
Reduced dividend and
capital gains tax rates
Investors will also reap benefits from the 2003 Act when they file their tax returns over the next several years.
The tax treatment of dividends has been a sore point with investors for years.
Corporate dividends have been taxed twice-once when the profit is earned by the corporation and again when the shareholder is paid a dividend by the company.
Making matters worse, the dividends were taxed as ordinary income and thus were subject to the highest tax rate the individual paid that tax year.
While the new law does not completely eliminate the double taxation concern, it does provide tax relief to investors receiving corporate dividends.
Under the 2003 Act, dividends are taxed at the same rates as capital gains.
Better news yet, the Act reduces the capital gain tax rates by 5 percent. The maximum net capital gains tax rate falls from 20 percent to 15 percent, and the 10 percent capital gains rate for lower-income taxpayers falls to 5 percent.
Wichert said the value of this change depends on the amount of investments and the dividends and capital gains a person receives and what income tax brackets he or she falls into.
“But in general, the dividends and capital gains rates are lower than your normal income tax rates,” he said. “So any income from that will be taxed at a lower rate.”
Most individuals won’t know the extent of this benefit until they complete their tax returns.
“A lot of times, if you have investments, like in mutual funds or something, you really don’t have a clear idea of what your dividends and capital gains are going to be at the end of the year,” Wichert said. “It’s really something hard to plan for.”
Adjusting your withholding
Once the 2003 returns are complete, taxpayers will have a better idea of what adjustments might be necessary in their withholding status for 2004.
“With these significant tax changes, depending on how an individual comes out when they file their tax return, they may want to change their withholding amounts with their employer,” Wichert said.
“If they end up with a very significant refund this year due to having so many taxes withheld, they may want to back off their withholding so they don’t have as much withheld in 2004,” he said. “That reduces their refund at the end of the year next year, but they get more in their net check each month.”
But if you do change your withholding for 2004, you’ll want to keep in mind that some of the tax reductions made possible by the 2003 Act expire after 2004 and revert to the pre-2003 tax law.
“A lot of them will be repealed for 2005 and go back to the 2002 amounts,” Wichert said. “I think when they made those changes in the law, what their budget would allow is for two years.”
As the law reads now, the accelerated child tax credit, marriage penalty relief and expansion of the 10 percent tax bracket apply only to the years 2003 and 2004. After that, the original time schedules established by the 2001 tax law will be followed.
The capital gains and dividend rate cuts are effective through 2008. After 2008, the tax rates revert to their pre-2003 levels unless provisions of the law are extended.
Wichert said there is no way of knowing whether there will be action to extend the benefits provided under the 2003 Act so that the tax reductions continue beyond 2004.
“You never know what they’ll do,” he said. “They’ve changed it twice in the last three years already.”