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| | ON-LINE Refund Status
 For 2003 you can check your refund status on-line directly from the IRS web site.
You will need your social security number, filing status, and the amount of
refund you are expecting as stated on your return. Click the IRS LOG to access
the IRS refund status page.
TAX NEWS FOR 2003
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) gives
immediate tax relief to individuals and small businesses. Since the majority of
the tax breaks are retroactive to January 1, 2003, and it lowers marginal tax
rates across the board, it will mean extra disposable income for all taxpayers
in 2003.
In addition, the law lightens the tax burden on investors by lowering the tax
rates on earnings from investments (including stock dividends). It also
provides significant tax incentives designed to help businesses grow and thrive.
Since many benefits are retroactively effective and all are temporary in
nature, it is important that you help your clients plan their strategy for
making the most of the new tax law's benefits.
Highlights
Some of the major highlights of what is being called the third largest tax
cut in US history are:
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Lower individual marginal tax rates
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Lower taxes on both capital gains and stock dividends
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Increase in child tax credit (rebate checks were sent to
eligible taxpayers already)
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Softening of the marriage penalty
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Expansion of the 10 percent bracket
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Alternative minimum tax relief
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Quadrupling of the amount small businesses can elect to
expense for purchase of "qualified property"
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Higher first year "bonus" depreciation for assets
acquired after May 5, 2003
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Estimated corporate tax payments postponed for third
quarter 2003 from September 15, 2003 to October 1, 2003
More Details
Before JGTRRA the marginal income tax rates were 10, 15,
27, 30, 35, and 38.6 percent. The new tax law changes marginal rates for 2003,
retroactive to January 1, 2003, to 10, 15, 25, 28, 33, and 35 percent.
Capital gains tax rate relief came as a surprise and was
part of the compromise for lower taxes on dividends. The tax rate on capital
gains drops from 20 to 15 percent for all taxpayers except those in the lowest
tax brackets. Taxpayers in the 10 and 15 percent brackets will pay 5 percent on
any capital gains recognized. The new 15 percent rate applies to transactions
occurring for gains able to be recognized on or after May 6, 2003, and under a
sunset provision, remains in effect only through December 31, 2008. In 2008,
taxpayers in the 10 and 15 percent brackets will be taxed on their capital gains
at zero percent. In 2009, capital gains rates are scheduled to return to the
then prevailing tax rates. The reduced rates and temporary nature of the
reductions call for immediate revisions in many taxpayers' investment
strategies.
Stock dividends, which had been taxed at the same rate as
ordinary income, will be taxed at 15 percent for most taxpayers effective
January 1, 2003. This rate remains in effect until December 31, 2008. Lower
income taxpayers will pay taxes on dividends at 5 percent effective January 1,
2003 through December 31, 2007. In 2008, lower income taxpayers will pay a zero
percent tax on dividends. However, not all corporate distributions are entitled
to tax-reduced dividend treatment, creating a new web of rules for shareholders
and corporations alike.
Before JGTRRA was enacted, the child tax credit for
dependent children younger than 17 for 2003 and 2004 was scheduled to be $600.
The new law increases the credit to $1,000. Beginning around July, the IRS will
send rebate checks ($400 per child) to qualifying individuals based on 2002 tax
returns. After 2004, the child tax credit will revert back to the previously
scheduled amount.
JGTRRA immediately raises the standard deduction for
married couples filing jointly to twice the standard deduction for single
taxpayers for 2003 and 2004. For 2003 the standard deduction is increased from
$7,950 to $9,500. As under prior law, the standard deduction is adjusted
annually for inflation. In 2005 the standard deduction for married couples
falls to 174 percent of the standard deduction for single taxpayers but doubles
again in 2010. This relief is eliminated in 2011. Of course, for couples who
itemize their deductions, this provision provides no benefit.
Note that the legislation does not eliminate the marriage
penalty. The tax brackets above 15% are not changed, thus, high-bracket
two-earner couples each earning about the same income will continue to suffer
under the marriage penalty.
Also included in the law is a slight increase in the
Alternative Minimum Tax (AMT) exemption amount for 2003 and 2004 only. The
individual AMT exemption amount increases from $49,000 to $58,000 for married
taxpayers filing joint returns and surviving spouses and from $35,750 to $40,250
for unmarried taxpayers for 2003 and 2004. Even with the increased AMT exemption
amounts, some higher income taxpayers in 2003 may move into an AMT situation
under the new tax rate regime. Some taxpayers with large AMT adjustments and
preferences may receive no benefit from the tax rate table adjustments (though
they may get some benefit from the new maximum tax rates on capital gains and
dividends which also apply in computing AMT).
Aid for Small Business Owners - An Increase and
Extension of Bonus Depreciation
JGTRRA quadruples the amount of qualified property that a
business can annually expense under Section 179 from $25,000 to $100,000 for
2003, 2004, and 2005. This amount will be indexed for inflation after 2003.
The amount of property placed in service before Section 179 begins to phase out
is increased from $200,000 to $400,000. JGTRRA also changed the definition of
qualifying property to include off-the-shelf computer software.
Last year, under the Job Creation and Worker Assistance Act
of 2002 (JCWA), businesses were given a 30 percent depreciation bonus for assets
acquired between September 11, 2001 and September 10, 2004. JGTRRA boosts the
bonus significantly to 50 percent for assets placed in service on or after May
6, 2003 and before January 1, 2005. This "bonus" is in addition to regular
first-year depreciation. If bonus depreciation will not be advantageous to your
client's business from a tax perspective, the law allows them to "elect out".
A special rule applies bonus depreciation to the purchase
of a "luxury" automobile. For "luxury automobiles", the limit on first year
depreciation is increased from $4,600 to $9,200 (an amount that is not indexed),
but bonus depreciation is not available where the auto is not used more than 50%
for business purposes.
Planning Ideas
Following are some planning tips regarding the passage of
this new law:
- Take advantage of rate spread -- The
spread between capital gains and ordinary income rates may now require some
adjustments to investment strategy by adjusting the asset allocation between
personal and retirement accounts. Your clients might be better off with fixed
income investment in tax deferred accounts and capital gain producing assets
in personal accounts.
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Think Long Term Capital Gains --
Long-term capital gains on sales and exchanges will be taxed at lower rates,
so the one-year holding period becomes even more important. There is now a
20% spread between ordinary income and capital gains so it becomes more
important to avoid short-term capital gains, which are taxed at the client's
marginal tax rate, under the new law.
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Diversify low basis stock -- This is
the perfect opportunity for your clients to sell some low-basis stock that
they have been holding too long since the tax rate on the gain may never be
lower. Many people with over-weighted positions in inherited stocks, stocks
received from the sale of a business or stocks held for a long time need to
consider the investment implications of making such a move.
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Take advantage of lower marginal rates --
There is an advantage to the immediacy of having a dividend in hand verses a
future potential capital gain. Deferring income to take advantage of lower
rates in future years under the old rate structure may make less sense. Who
knows how long these rates will be in effect? Future tax deductions can become
a little less attractive with the lower marginal rates.
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Reconsider decision on taxable verses tax-free
bonds -- The change in tax rates will also prompt the reconsideration
of the decision of taxable vs. tax-free bond investments. Any investment in
tax exempt bonds will be much less attractive as after-tax yields on taxable
investments increase. While short term fixed income rates are at historic
lows, with a lower marginal tax rate, you should look at your client's bond
and money market accounts to make sure that they are positioned properly.
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Beware of the AMT -- Congress made only
minor changes to the Alternative Minimum Tax (AMT) exemption in this new law,
so you would not think that there would be much impact. Think again. Since the
AMT is calculated as a separate tax calculation your clients will pay the
higher of AMT or regular tax, so anything that reduces regular tax has the
potential to pull your client into AMT or increase an existing AMT burden.
Many more taxpayers will now have to incorporate AMT planning in their
situation.
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Consider small business incentive of
depreciation -- Dramatically enhanced expensing of assets purchased
this year (up to $100,000) and increased bonus depreciation (50% of the cost
of property acquired after 5/5/03) will have a significant impact on business
decisions to buy equipment, computers, etc. This will also come into play when
evaluating rental real estate
IRS Drops Interest Rates – Lowest Since 1975
Effective January 1, 2003,
the Internal Revenue Service will drop interest rates by one percentage point.
The following new rates will apply:
- 5% interest on tax overpayments
- 5% interest on tax underpayments
- 7% interest on tax underpayments by large corporations
- 2 1/2% interest on the portion of a corporate overpayment exceeding $10,000
These rates will apply for the first quarter of 2003. These are the lowest rates since 1975.
The interest rates are computed from the federal short-term rate based on
daily compounding determined during October 2002.
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