Get a grip. (Federal Tax).
On May 28, President Bush signed the 2003 Jobs and Growth Tax Relief Reconciliation Act into law.
Following are highlights of selected provisions:
CHANGES AFFECTING NONCORPORATE TAXPAYERS
REDUCED CAPITAL GAIN TAX RATES
Under the old law, the maximum tax rate on a noncorporate taxpayer's adjusted net long-term capital gain was 20 percent, or 10 percent for taxpayers in the 10 percent or 15 percent brackets. These rates applied for both regular tax and the ANT.
There also was a maximum 25 percent tax rate on unrecaptured Sec. 1250 gain, a maximum 28 percent rate on net long-term capital gain on the sale or exchange of collectibles and an effective 14 percent regular tax rate on qualified gain from small-business stock. Any amount of unrecaptured Sec. 1250 gain or 28 percent rate gain otherwise taxed at a 15 percent rate was taxed at the 15 percent rate.
Any gain from the sale or exchange of property held more than five years that would otherwise be taxed at the 10 percent rate was taxed at an 8 percent rate. Any gain from the sale or exchange of property held more than five years, whose holding period began after 2000, which would otherwise be taxed at the 20 percent rate, was taxed at an 18 percent rate.
The new law reduces these 10 percent and 20 percent capital tax rates to 5 percent and 15 percent for both the regular tax and AMT. These lower rates apply to assets held more than one year.
The 5 percent tax rate is reduced to 0 percent for tax years beginning after 2007.
These new tax rates apply to tax years ending after May 5, 2003, but will not apply to tax years beginning after 2008.
For tax years that include May 6, 2003, the lower rates apply to amounts properly taken into account for the portion of the year on or after that date. This generally has the effect of applying the lower rates to capital assets sold or exchanged, and installment payments received, after May 5, 2003. In the case of gain and loss taken into account by a pass-through entity, the date taken into account by the entity is the appropriate date for applying this rule.
REDUCED TAX RATES ON DIVIDENDS
For tax years beginning after 2002 and before 2009, qualified dividends received by, noncorporate shareholders the same rates that apply to net capital gains. Therefore, during this time period, these dividends will not be taxed as ordinary income but, instead, will be subject to tax rates of only 5 percent or 15 percent (as described above). This treatment applies for both the regular tax and the AMT.
Qualified dividends generally are dividends received from domestic corporations and qualified foreign corporations (discussed below).
If a shareholder does not hold a share of stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date, dividends received on the stock are ineligible for the reduced rates. (For stock having preference in dividends, this holding period is for more than 90 days during the 180-day period beginning 90 days before the ex-dividend date.)
These reduced tax rates also are not available for dividends to the extent that the taxpayer is obligated, whether pursuant to a short sale or otherwise, to make related payments with respect to positions in substantially similar or related property.
If an individual receives an extraordinary dividend eligible for the reduced rates with respect to any share of stock, any loss on the stock's sale is treated as a long-term capital loss to the extent of the dividend. Under IRC Sec. 1059(c), an extraordinary dividend is any dividend that equals or exceeds the following percentage of the taxpayer's adjusted basis in that share of stock:
* 5 percent for stock preferred as to dividends; or
* 10 percent for any other stock.
A dividend is treated as investment income to determine the amount of deductible investment interest only if the taxpayer elects to treat the dividend as ineligible for these reduced tax rates.
The amount of dividends qualifying for the reduced rates that may be paid by a regulated investment company or real estate investment trust, for any tax year that the total qualifying dividends received by the RIC or REIT are less than 95 percent of its gross income (as specially computed), may not exceed the amount of the total qualifying dividends received by the RIG or REIT.
In the case of a REIT, an amount equal to the excess of the income subject to the taxes imposed by Sec. 857(b)(1) and the regulations prescribed under Sec. 337(d) for the preceding tax year over the amount of those taxes for the preceding tax year is treated as qualified dividend income. These particular rules apply to tax years ending after Dec. 31, 2002, except that dividends received by RIGs or REITs on or before such date are not qualified dividends.
The reduced tax rates do not apply to:
* Dividends received from an organization that was exempt from tax under Sec. 501 or was a tax-exempt farmers' cooperative in either the tax year of the distribution or the preceding tax year;
* Dividends received from a mutual savings bank that received a deduction under Sec. 591; or
* Deductible dividends, under Sec. 404(k), paid on employer securities held by an ESOP.
Amounts treated as ordinary income on the disposition of certain preferred stock under Sec. 306 are treated as dividends for purposes of applying the reduced rates. This treatment also may apply to such other provisions as the IRS may specify, including provisions at the corporate level.
Payments in lieu of dividends are not qualified dividends. In the case of brokers and dealers who engage in securities lending transactions, short sales or other similar transactions on their customers', behalf in the normal course of their business, Congressional conferees intend that the IRS will exercise its authority under Sec. 6724(a) to waive penalties where dealers and brokers attempt in good faith to comply with the information reporting requirements under Secs. 6042 and 6045, but are unable to reasonably comply because of the period necessary to conform their information reporting systems to the retroactive rate reductions on qualified dividends.
In addition, the conferees expect that individuals who receive payments in lieu of dividends from these transactions may treat the payments as dividends to the extent that the payments are reported to them as dividends on their 2003 Forms 1099-DIV, unless they know, or have reason to know, that the payments are payments in lieu of dividends rather than actual dividends. The conferees expect that the Treasury will issue guidance as rapidly as possible on information reporting with respect to payments in lieu of dividends made to individuals.
Qualified Foreign Corporations
The term "qualified foreign corporation" includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States, which the Treasury determines to be satisfactory for purposes of this provision, and which includes an information exchange program. The conferees do not believe that the current income tax treaty between the United States and Barbados is satisfactory for this purpose because that treaty may operate to provide benefits that are intended for the purpose of mitigating or eliminating double taxation to corporations that are not at risk of double taxation.
The conferees intend that, until the Treasury issues guidance regarding the determination of treaties as satisfactory for this purpose, a foreign corporation will be considered to be a qualified foreign corporation if it is eligible for the benefits of a comprehensive income tax treaty with the United States that includes an information exchange program other than the current United States-Barbados income tax treaty. The conferees further intend that a company will be eligible for benefits of a comprehensive income tax treaty within the meaning of this provision if it would qualify for the treaty's benefits with respect to substantially all of its income in the tax year in which the dividend is paid.
In addition, a foreign corporation is treated as a qualified foreign corporation with respect to any dividend paid by the corporation on stock that is readily tradable on an established U.S. securities market. For this purpose, a share will be treated as so traded if an American Depository Receipt backed by that share is so traded.
Dividends received from a foreign corporation that was a foreign investment company defined in Sec. 1246(b), a passive foreign investment company as defined in Sec. 1297 or a foreign personal holding company as defined in Sec. 552 in either the tax year of the distribution or the preceding tax year are not qualified dividends.
Special rules apply in determining a taxpayer's foreign tax credit limitation under Sec. 904 in the case of qualified dividend income. For these purposes, rules similar to the rules of Sec. 904(b)(2)(B) concerning adjustments to the foreign tax credit limitation to reflect any capital gain rate differential will apply to any qualified dividend income. Additionally, it is anticipated that regulations promulgated under this provision will coordinate the operation of the rules applicable to qualified dividend income and capital gain.
10 PERCENT REGULAR INCOME TAX RATE
Under the old law, the 10-percent rate applies to the following portions of taxable income:
* Single--first $6,000
* Heads of households--first $10,000
* Married filing jointly--first $12,000
* For 2008 and thereafter, the $6,000 will increase to $7,000 and the $12,000 will increase to $14,000.
For tax years beginning after 2008, the taxable income levels for the 10-percent bracket will be adjusted annually for inflation. This bracket will be rounded down to the nearest $50 for joint returns and head of household returns. The bracket for single individuals and married individuals filing separately will be one-half of the bracket for joint returns (after any inflation adjustment).
The new law temporarily accelerates the increase in the taxable income levels for the 10-percent bracket, as follows:
Single or Married Married Filing Heads of Filling Tax Year Separately Households Jointly 2003 $7,000 $10,000 $14,000 2004 7,000 10,000 14,000 2005 6,000 10,000 12,000 2006 6,000 10,000 12,000 2007 6,000 10,000 12,000 2008 7,000 10,000 14,000 2009 7,000 10,000 14,000 2010 7,000 10,000 14,000 2011 Expires Expires Expires
These taxable income levels will be adjusted annually for inflation for tax years beginning after 2003.
They also will be adjusted annually for inflation for tax years beginning after 2008.
REDUCTION OF OTHER REGULAR INCOME TAX RATES Under the old law, the pre-2001 Tax Act regular income tax rates of 28 percent, 31 percent, 36 percent and 39.6 percent were phased down as follows (in percents): Calendar year 28% 31% 36% 39.6% 2001 27.5 30.5 35.5 39.1 2002-03 27 30 35 38.6 2004-05 26 29 34 37.6 2006 and later 25 28 33 35 The new law accelerates these tax rate reductions, as follows: Calendar year 28% 31% 36% 39.6% 2001 27.5 30.5 35.5 39.1 2002 27 30 35 38.6 2003 & later 25 28 33 35 Caution: Absent further legislation, the pre-2001 Tax Act tax rates will be reinstated for 2011 and subsequent years. AMT EXEMPTIONS Under the old law, the following AMT exemptions applied: Tax Year Joint Married Filed Estate Beginning In Return Single Separately or Trust 2003 $49,000 $35,750 $24,500 $22,500 2004 49,000 35,750 24,500 22,500 2005 & later 45,000 33,750 22,500 22,500 The new law increases the AMT exemption individuals, as follows: Tax Year Joint Married Filed Estate Beginning In Return Single Separately or Trust 2003 $58,000 $40,250 $29,000 $22,500 2004 58,000 40,250 29,000 22,500 2005 & later 45,000 33,750 22,500 22,500 CHILD TAX CREDIT Under the old law, for tax years beginning after 2000, the child credit was increased to $1,000, but phased in over 10 years as follows: Credit Amount Calendar year Per Child 2001-04 $600 2005-08 $700 2009 $800 2010 $1,000 2011 & later $500
The new law increases the child credit to $1,000 for 2003 and 2004. For calendar years after 2004, the credit amounts shown immediately above will continue to apply.
For 2003, the increased amount of the child credit will be paid in advance beginning in July, based on information in each taxpayer's 2002 return filed in 2003. The IRS is not expected to issue advance payment checks to an individual who did not claim the child credit for 2002.
These payments will be made in a manner similar to the advance payment checks issued by the Treasury in 2001 to reflect the creation of the 10-percent regular income tax bracket. The advance payment for each qualifying child is determined as follows:
New credit amount effective for 2003 $1,000 Less credit amount claimed for 2002 -600 Advance payment $400
Note: Only the taxpayer's qualifying children [as defined in Sec. 24(c)] for 2002 who will not attain age 17 as of Dec. 31, 2003 are taken into account for this purpose.
In addition, under new Sec. 6429(b) (3), the rule for computing the refundable child credit for families with three or more children (described below) does not apply in determining the advance payment.
Under both the old and new law, the child credit is refundable to the extent of 10 percent of the taxpayer's earned income exceeding $10,000 for calendar years 200 1-04. This percentage is increased to 15 percent for calendar years 2005 and later. The $10,000 is indexed for inflation beginning in 2002. Thus, it was $10,350 for 2002 and is $10,500 for 2003.
Observation: The increase in refundability to 15 percent of the taxpayer's earned income, scheduled for 2005 and thereafter, is not accelerated under the new law.
Families with three or more children are allowed a refundable credit for the amount by which the taxpayer's Social Security taxes exceed the taxpayer's earned income credit if that amount is greater than the refundable credit based on 10 percent (or 15 percent after 2004) of the taxpayer's earned income exceeding $10,350 for 2002 or $10,500 for 2003.
The refundable portion of the child credit does not constitute income and cannot be treated as resources to determine eligibility or the amount or nature of benefits or assistance under any federal program or any state or local program financed with federal funds.
These provisions apply to tax years beginning after 2000.
INCREASED BASIC STANDARD DEDUCTION
MARRIAGE PENALTY RELIEF
Individuals who do not itemize deductions may choose the basic standard deduction plus additional standard deductions if they are 65 years old or over or blind. Under the old law, for 2003, the basic standard deduction for married couples filing joint returns was 167 percent of the basic standard deduction for single filers. For tax years beginning after 2004, the basic standard deduction for a married couple filing a joint return was increased to twice the basic standard deduction for an unmarried individual filing a single return. However, this increased standard deduction was phased in over five years as follows:
Calendar year Phase-in Percentage 2005 174% 2006 184% 2007 187% 2008 190% 2009 200% 2010 200%
The new law increases the basic standard deduction for joint returns to twice the basic standard deduction for single returns, effective for 2003 and 2004. For tax years beginning after 2004, the percentages shown immediately above will continue to apply.
Caution: For tax years beginning after 2010, absent further legislation, the lower pre-2001 Tax Act statutory basic standard dollar amount, adjusted annually for inflation, will apply to married couples filing joint returns.
EXPANDED 15-PERCENT BRACKET FOR MARRIED COUPLES FILING JOINT RETURNS
Under the 2001 Tax Act, the 15-percent regular income tax rate bracket was increased for a married couple filing joint returns to twice the size of the corresponding bracket for an unmarried individual filing a single return. Before the 2001 Tax Act's effective date for this provision, the difference was 167 percent. This increased bracket was effective for tax years beginning after 2004, but was phased in over four years as follows:
Calendar year Phase-in Percentage 2005 180% 2006 187% 2007 193% 2008 through 2010 200%
The new law increases the size of the 15-percent regular income tax rate bracket for joint returns to twice the width of the 15-percent bracket for single returns for tax years beginning in 2003 and 2004. For tax years beginning after 2004, the percentages shown immediately above will continue to apply.
Caution: The increases in the 15-percent bracket for married couples filing joint returns will be repealed for tax years beginning after 2010, unless new legislation is enacted.
SPECIAL PENALTY TAXES
CHANGES AFFECTING CORPORATIONS
The tax rates for the accumulated earnings tax and the personal holding company tax is reduced to 15 percent for tax years beginning after 2002 and before 2009.
The collapsible corporation rules under Sec. 341 are repealed for tax years beginning after 2002 and before 2009.
Only 75 percent of an estimated tax payment due Sept. 15, 2003 must be paid by that date. The remaining 25 percent is not due until Oct. 1, 2003. This affects the following corporations:
Tax Year-End Installment Due Sept. 15, 2003 Sept. 30, 2003 Fourth Dec. 31, 2003 Third March 31, 2004 Second May 31, 2004 First
GROWTH INCENTIVES FOR BUSINESS
INCREASED SEC. 179 DEDUCTION FOR SMALL BUSINESS
The new law provides that the maximum dollar amount that may be deducted under Sec. 179 is increased from $25,000 to $100,000 for qualifying property placed in service in tax years beginning in 2003, 2004 and 2005.
Under the old law, the $25,000 amount was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeded $200,000. Under the new law, the $100,000 maximum deduction is reduced by the amount by which the cost of such property exceeds $400,000-for tax years beginning in 2003, 2004 and 2005.
These $100,000 and $400,000 limitations will be indexed for inflation for tax years beginning in 2004 and 2005.
Off-the-shelf computer software placed in service in a tax year beginning in 2003, 2004 and 2005 will be qualifying property.
The new law permits taxpayers to make or revoke Sec. 179 expense deduction elections on amended returns without IRS consent for tax years beginning in 2003, 2004 and 2005. However, any such revocation is irrevocable.
INCREASE AND EXTENSION OF BONUS DEPRECIATION
The 2002 Tax Act allows an additional depreciation deduction for both the regular tax and AMT, equal to 30 percent of the adjusted basis of "qualified property," for the tax year in which the property is placed in service. (For more details, see the May 2002 California CPA, Page 33 and June 2002, Page 33.)
For tax years ending after May 5, 2003, the new law provides an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property. A taxpayer can elect out of this 50 percent deduction for any class of property for any tax year.
Qualified property is defined in the same manner as for the 30 percent deduction except that the applicable time period for the property's acquisition (or self-construction) is modified. In addition, the property must be placed in service before 2005 to qualify. A one-year extension of this placed in service date (i.e., before 2006) is provided for certain property with a recovery period of 10 years or longer and certain transportation property as defined for purposes of the 2002 Tax Act.
Property for which this 50 percent deduction is claimed is not eligible for the 30 percent deduction.
To qualify, the property must be acquired after May 5, 2003 and before 2005, but only if no binding written contract for the acquisition was in effect before May 6, 2003. Property does not fail to qualify for this deduction merely because a binding written contract to acquire a component of the property was in effect before May 6, 2003. However, no additional first-year depreciation is permitted for that component. The House Ways and Means Committee's Report states that no inference is intended as to the proper treatment of components placed in service under the 30-percent deduction provided by the 2002 Tax Act.
With respect to property manufactured, constructed or produced by the taxpayer for the taxpayer's use, the taxpayer must begin the property's manufacture, construction or production after May 5, 2003.
For property eligible for the extended placed in service date (i.e., certain property with a recovery period of 10 years or longer and certain transportation property), only progress expenditures properly attributable to costs incurred before 2005 are eligible for this deduction. To determine such eligible progress expenditures, Congress intends that rules similar to Sec. 46(d),(3), as in effect before the 1986 Tax Reform Act, shall apply.
The House Ways and Means Committee, without modification by the Conference Committee, wishes to clarify that the adjusted basis of qualified property acquired in a like-kind exchange or an involuntary conversion is eligible for the additional first-year depreciation deduction.
For certain passenger automobiles that qualify for this new 50 percent deduction and for which there is no election out, the new law also increases the limitation on the amount of depreciation deductions allowed under Sec. 280F in the first year by $7,650, instead of the $4,600 provided by the 2002 Tax Act. This increase is not indexed for inflation.
For property eligible for the existing 30 percent deduction, the new law extends the date for meeting certain time requirements by substituting "Jan. 1, 2005" for "Sept. 11, 2004," as follows:
* Under Sec. 168(k)(2)(A)(iii), qualified property must be acquired after Sept. 10, 2001, and before Jan. 1, 2005, but only if no binding written contract was in effect before Sept. 11, 2001, or acquired under a binding written contract entered into after Sept. 10, 2001, and before Jan. 1, 2005.
* Under Sec. 168(k)(2)(B)(ii), only the adjusted basis of certain property having a longer production period which is attributable to manufacture, construction or production before Jan. 1, 2005 qualifies for the 30-percent deduction.
* Under Sec. 168(k)(2)(D)(i), the taxpayer must begin manufacturing, constructing or producing self-constructed property after Sept. 10, 2001, and before Jan. 1, 2005.
The new law provides that the election out shall be applied separately with respect to property eligible for the 50 percent deduction and "other qualified property," presumably property eligible for the 30 percent deduction.
Stuart R. Josephs, CPA, has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at (619) 469-6999 or email@example.com.
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|Title Annotation:||highlights of 2003 Jobs and Growth Tax Relief Reconciliation Act|
|Author:||Josephs, Stuart R.|
|Date:||Jul 1, 2003|
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