by Michael G. Stevens
“Well, there you go again,” was one of President Ronald Reagan’s favorite phrases. Now we can say that phrase applies to President Bush and Congress. Less than two years after significant tax reduction legislation was enacted at Bush’s prodding, a new set of tax incentives have been unleashed, the “Jobs and Growth Tax Relief Reconciliation Act of 2003,” (the Act) P.L. 108-27, May 28, 2003. Regardless of the economic and political implications, accountants once again have to gear up to ensure their clients are fully taking advantage of the changes, especially the planning aspects.
The IRS quickly issued revised withholding tables to reflect changes made by the law. See Notice 1036 at http://www.irs.gov/pub/irs-pdf/n1036.pdf.
The new law accelerates tax benefits first enacted in 2001 including the reduction of many tax brackets, increases the exemption amounts for the alternative minimum tax (AMT), provides new growth incentives for businesses with regard to depreciation and expensing of property, and cuts the tax rates on capital gains and dividends. The differing start and stop effective dates for these provisions will complicate the planning process.
Acceleration of Tax Reductions
Title I of the new law contains accelerations of a number of previously enacted tax reductions. Each is made subject to the “Economic Growth and Tax Relief Reconciliation Act of 2001’s” sunset provision.
Child Tax Credit. The child tax credit goes up to $1,000 for 2003 and 2004. After 2004, it will revert to pre-Act levels of $700 for 2005-2008, $800 for 2009 and back to $1,000 by 2010. For 2003, the increase in the credit will be paid in the form of advance payment checks beginning this month based on information on each taxpayer’s 2002 tax return filed in 2003.
Marriage Penalty Relief. In an effort to accelerate relief from the “marriage penalty,” the basic standard deduction amount for joint returns is increasing to twice the basic standard deduction amount for single returns for 2003 and 2004. For taxable years beginning after 2004, the applicable percentages will revert to those allowed under pre-Act law.
The Act also accelerates the expansion of the 15 percent regular income tax rate bracket for married couples filing joint returns to twice the width of the 15 percent regular income tax bracket for single returns for taxable years beginning in 2003 and 2004. For taxable years beginning after 2004, the applicable percentages will revert to those allowed under pre-Act law.
Individual Tax Rate Reductions.The Act accelerates tax rate reductions that were enacted in 2001. For example, taxable income levels for the 10 percent rate bracket previously scheduled for 2008 are effective in 2003 and 2004. For unmarried individuals, the bracket goes to $7,000 and for marrieds filing jointly to $14,000. These levels will be adjusted annually for inflation for taxable years beginning after December 31, 2003. For taxable years beginning after December 31, 2004, these levels will revert to levels allowed under pre-Act law.
The Act also accelerates the reductions in the regular income tax rates in excess of the 15 percent regular income tax rate that were scheduled for 2004 and 2006. For 2003 and after, the regular income tax rates in excess of 15 percent are 25 percent, 28 percent, 33 percent, and 35 percent.
AMT Exemption Increase.The Act increases the AMT exemption amount for married taxpayers filing a joint return and surviving spouses to $58,000, and for unmarried taxpayers to $40,250 for taxable years beginning in 2003 and 2004.
Business Tax Breaks
Under Title II of the Act, additional first-year depreciation jumps to 50 percent of the adjusted basis of qualified property which has the same meaning as for pre-Act 30 percent bonus depreciation except for time modifications. To qualify, the property must be acquired after May 5, 2003 and before January 1, 2005. Property does not qualify if there was a written binding contract for the acquisition in effect before May 6, 2003.
Property for which 50 percent additional first year depreciation is claimed is not eligible for the 30 percent deduction. As to property that is manufactured, constructed, or produced by the taxpayer for use by the taxpayer, the manufacture, construction, or production of the property must be begun after May 5, 2003. A special rule limits the amount of costs eligible for bonus depreciation as to certain property with a recovery period of 10 years or longer, and certain transportation property.
The Act clarifies that the adjusted basis of qualified property acquired by a taxpayer in a like-kind exchange or an involuntary conversion is eligible for the additional first year depreciation deduction.
The Act also increases the limitation on the amount of depreciation deductions allowed as to certain passenger automobiles under Section 280F to $7,650 for automobiles that qualify; this will not be indexed for inflation.
The Act boosts the maximum Section 179 expensing amount to $100,000, up from $25,000, for property placed in service in taxable years beginning in 2003, 2004, and 2005. The threshold for reducing the amount eligible for expensing goes to $400,000 up from $200,000 for the same time period. Thus the cost of qualifying property placed in service during the taxable year in excess of $400,000 will reduce the $100,000 expensing amount. Off-the-shelf computer software placed in service in a taxable year beginning in 2003, 2004, and 2005 qualifies as Section 179 property.
The dollar limitations will be indexed annually for inflation for taxable years beginning after 2003 and before 2006. For this period, taxpayers may make or revoke expensing elections on amended returns without the consent of the IRS.
Lower Capital Gains and Dividends
Title III of the Act reduces the 10 and 20 percent rates on adjusted net capital gain to five and 15 percent respectively. These lower rates apply to both the regular tax and the AMT. The lower rates apply to assets held more than one year. The cuts apply to taxable years on or after May 6, 2003 and through December 31, 2007 as to the five percent rate which then becomes zero for one year, and through December 31, 2008 for the 15 percent rate. For taxable 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) on or after May 6, 2003. In the case of gain or 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.
Under the Act, “qualified dividend income” received by an individual shareholder from domestic corporations is taxed at the same rates that apply to net capital gain, for purposes of both the regular tax and the AMT. Thus, dividends will be taxed at five and 15 percent (at zero percent from five percent in 2008), with pre-Act rates applying after 2008.
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 (as measured in Section 246(c)), dividends received on the stock are not eligible for the reduced rates. These rates are also not available for dividends to the extent that the taxpayer is obligated to make related payments as to positions in substantially similar or related property.
Qualified dividend income means dividends received during the taxable year from domestic corporations and “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 U.S. which the Treasury Department determines to be satisfactory for purposes of this provision, and which includes an exchange of information program. In addition, a foreign corporation is treated as a qualified foreign corporation as to any dividend paid by the corporation with respect to stock that is readily tradable on an established securities market in the U.S.
Qualified dividend income does not include: any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under Section 501 or 502; any amount allowed as deduction under Section 591 relating to a deduction for dividends paid by mutual savings banks, etc.; and any dividend described in Section 404(k).
If an individual receives an extraordinary dividend (under Section 1059(c)) eligible for the reduced rates as to any share of stock, any loss on the sale of the stock is treated as a long-term capital loss to the extent of the dividend.
Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under Section 163(d)(4)(B). Amounts treated as ordinary income on the disposition of certain preferred stock (Section 306) are treated as dividends for this purpose. And in a conforming amendment, the collapsible corporations (Section 341) have been repealed.
Special rules also address the foreign tax credit limitation, REITs, and brokers and dealers who engage in securities lending transactions, short sales, or other similar transactions on behalf of customers in the normal course of their trade or business.
The Act’s dividend provisions, except for a special rule for regulated investment companies, apply to taxable years beginning after December 31, 2002, and beginning before January 1, 2009. Similarly, the capital gains changes shall not apply to taxable years beginning after December 31, 2008.
Complexity and Confusion
Taxpayers will love the tax cuts, and accountants will savor the new planning opportunities. But neither will appreciate the added complexity and probable confusion caused by the various phase-ins/outs, the fact the new law makes further reductions to some earlier rate reductions, and added new rate reductions. And then there are the “nefarious” sunset provisions that will virtually ensure a third or perhaps fourth piece of tax legislation.
Delay in Corporate Estimated Tax Payment
Under Title V of the Act, notwithstanding Section 6655, 25 percent of the amount of any required installment of corporate estimated tax which is otherwise due in September 2003 shall not be due until October 1, 2003.
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