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Jobs and Growth Tax Relief
Reconciliation Act of 2003 (JGTRRA)
by: James
Lange, CPA, JD
On
May 28, 2003, President Bush signed the Jobs and
Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).
The
act includes:
- Reduced income tax
rates
- Reduced tax on
qualifying dividends
- Reduced capital
gains tax
- Increased child care
credit
- Mild alternative
minimum tax relief
- Faster depreciation
for small business
- Marriage penalty
relief
- Revised tax brackets
resulting in less tax
- A whole lot more
The Bottom Line
For
most of my clients, the most important changes will be
the changes in the income tax rates and the income tax
brackets. Of less importance will be the break on tax
dividends and capital gains because most of my clients
have the majority of their investments inside IRAs and
retirement plans. The current legislation does not
have any direct impact on IRAs and retirement plans.
Presumably, the impact will be felt in the increased
value of your stocks, even if still in your IRA or
retirement plan.
For
your convenience, we will be sending out an update of
our Tax Reference Card with all the new income tax
rates and tax brackets. You might want to recalculate
your anticipated liability under JGTRRA and consider
lowering your withholdings or estimated tax
payments. You should, however, consider that there
is also an adjustment to the withholding tables that
will reduce the amount of tax withheld.
We
start with logical Action Points in response to the
new legislation, move to the big picture and conclude
with a short description of the changes. The source
for much of this information comes from: CCH Tax
Briefings, Special Report Tax 2003.
I
also want to alert you to a special radio broadcast at
7:30 p.m., Eastern Standard Time, June 11, 2003 on KQV
1410 AM (in the Pittsburgh area). I will be the guest
of Ron Weiss on the
Arthur Lestrange Financial Forum. KQV also
streams its broadcasts on the web at
www.kqv.com. There are more particulars on the
broadcast at the end of this newsletter.
Action Points
Charlie Smith, Chief Investment Officer of Fort Pitt
Capital Group, comments on the impact of JGTRRA from
an investment viewpoint. “Everything in the
investment world happens at the margin. This is a
marginal change, not a sea change. At the margin, it
makes stocks more attractive than bonds. We are not
at the point, however, where the change in the tax law
should drive the investment decision.”
Taxpayers should recalculate their anticipated
liability with the new laws and consider lowering
their withholdings or estimated tax payments.
It is
time to get married! There are no more excuses—you’ve
waited long enough to avoid the “marriage penalty.”
The change in the tax brackets and the increase in
itemized deductions effectively eliminate the marriage
penalty.
Retirement plan, IRA and Roth IRAs owners: stay the
course. We have run numbers and determined, even with
the reduced taxes and the special dividend rate
reduction, our time-honored advice to pay taxes
later continues to apply. The most important
exception to this rule stands as well: the Roth IRA
and the Roth IRA conversion. If you are currently
taking distributions, you will enjoy some of the
benefits of this tax act.
Traditional “C” corporation owners have even a higher
incentive to switch to LLC or Subchapter S status.
Profitable small businesses owners can enjoy greater
depreciation benefits and if needed, should consider
purchasing qualifying equipment.
The
real truth is the resulting tax code now has
constantly changing income tax rates, income tax
brackets, and other shifting provisions. These
constant changes along with the uncertainty of the
sunset provisions create massive uncertainty, and
seriously hinder everyone’s ability to do effective
planning.
The Big Picture
This
was one of the most contentious pieces of tax
legislation ever passed. The House voted 231-200 in
favor, the Senate voted 51-50 with the Vice President
casting the tie-breaking vote. Both the House and the
Senate voted primarily on party lines. The Committee
that hammered out the differences between the House
and Senate came up with a bill that was signed by
President Bush on May 28th.
If
you are one of fortunate 184,000 taxpayers making more
than $1M per year, you can expect to see an average
tax savings of $93,500 in 2003. If you are one of
roughly 8,000,000 low and middle-income taxpayers, you
will receive no benefits from the new legislation.
Half of all households in the nation either will
receive no tax cut or will get a tax cut of $100 or
less.
The
enormity of the change is difficult to comprehend.
The $350 billion dollar number is misleading. Though
billed as a $350 billion dollar cut, its true impact
is far greater due to the “sunset provisions.” The
technique, also employed widely under EGTRRA (Economic
Growth Tax Relief Reconciliation Act of 2001), the
first major tax cut signed by President Bush, is to
make sweeping changes, but make the changes
temporary. At the end of the term, the “sunset
provisions” return the law to where it was before the
changes. This sunset provision allows the master
number-crunchers to cap the tax cut, while knowing
that once the public becomes accustomed to the
changes, future Congresses will find it difficult to
fail to extend the many benefits of this bill. The
total costs of the two most recent tax law acts,
EGTRRA and JGTRRA, if extended beyond 2010, will be
between $430 billion and $2.7 trillion by the year
2013, depending on which source you believe.
JGTRRA is certainly not the first legislation to
employ the sunset provision gimmick. Nonetheless,
depending on which figures you believe and the
specific way you define the terms, the magnitude of
gimmicks in this legislation and President Bush's
earlier tax cut (EGTRRA) exceeds that of prior
administrations by a factor of 20 or more. One source
for this newsletter, Center on Budget and Policy
Priorities found at
www.cbpp.org, a group that obviously doesn’t
support the legislation as written. Opposing
viewpoints are found at the Republican National
Committee’s web site,
www.rnc.org.
Among
the winners are tax attorneys at the corporate level
and income tax preparers at the individual level,
courtesy of the enormous complications inherent in the
JGTRRA. Producers of tax preparation software such as
Turbo Tax® or Tax Cuts® should also get a boost as it
will be harder and harder for individual self
preparers to complete their tax return without the aid
of computer software. Existing self-preparers using
computer software may expect additional complications,
but many of the changes will be “seamless,” and you
will still be able to prepare your return.
Short Descriptions of the Changes
Capital Gains
Reductions
Capital gains rates fall from 20% to15% for higher
income earners for qualifying property sold between
May 6, 2003 through December 31, 2007.
For
lower income taxpayers, the current 10% rate falls to
5%. In 2008, there will be a zero percent capital
gains for lower income taxpayers. Then, on January 1,
2009, the sunset provisions spring to life (maybe) and
capital gains taxes will increase to prior levels.
The
big difference between the highest tax rate of 35% and
the highest capital gains rate of 15% makes tax
planning even more important. The five-year holding
period created by EGTRRA is effectively repealed.
Reduced Taxation on
Dividends
Dividend income from a qualifying corporation will be
taxed at a maximum rate of 15% for most taxpayers.
Lower income individuals will pay tax on dividends at
5%. Many dividends will not qualify for the lower 15%
rate. You can expect to see controversy and
litigation over which dividends will qualify for
special treatment and which will not.
Small Business
Provisions
Profitable business owners should plan for greater
equipment purchases if that is the right move for your
business. Section 179 property, specific property for
which a business can purchase and depreciate 100% of
the cost in the first year, increases from $25,000 to
$100,000. In addition bonus depreciation will
increase from 30% to 50% for qualifying property.
Please note that only businesses purchasing more than
$25,000 of qualifying equipment will receive any
additional depreciation benefits.
Child Tax
Credit
The new law boosts the
credit from $600 to $1,000 per child for 2003 and 2004
for certain taxpayers. From 2005—2009, the credit
will be $700, but then back to $1,000 in 2010. Based
on your 2002 return, the IRS is planning on sending
checks to taxpayers with children. The check will be
$400 per eligible child.
Please note that even though the law increases the
credit from $600 to $1,000, the checks qualifying
families can expect to receive is for $400.
Qualifying taxpayers can request the additional $600
when they file their return. In order to qualify for
the credit, taxpayers must fall within certain income
guidelines. These guidelines were fiercely disputed
and are the subject of the front-page story of the
New York Times. The New York Times
and the Center for Policy and Budget Priorities
claimed that the income limitations on the new tax act
unfairly excluded working poor taxpayers with
children. The Wall Street Journal’s
editorial page disputed the claim.
Just
yesterday, June 5, 2003, (after I thought this e-mail
newsletter was done), the Senate responded to
widespread criticism by passing a new resolution
changing the income limitations on the child tax
credit. I will describe both the law as it stands
today and provide a brief summary of the Senate
resolution. It should be noted, however, that even
though the Senate passed the new resolution 94-2, the
Senate resolution is not law because it did not pass
the House, nor is it signed by the President. What is
relatively certain is that we will see additional
changes in the limitations of which families will
qualify for the child tax credit. The proposed
changes increases eligibility for the child tax credit
both on the low and high income ranges.
First, the law as signed by President Bush is the
current law.
Before we get into the income limitations, let’s do an
easy example where the income limitation doesn’t
apply.
A
married couple with income of $60,000 has two
children. Under pre JGTRRA law, the credit would be
calculated as follows: 2 children times $600 or
$1,200. Under post JGTRRA, the couple would receive
the additional $400 credit per child for a total of
$2,000. The IRS will mail this couple a check for
$800 and they can claim the additional $1,200 when
they file their tax return, IRS Form 1040.
The
child tax credit for married filing jointly is
currently limited to 10% of your earned income above
$10,500 or $600, whichever is lower. Thus many
minimum wage earners will not enjoy any increase in
the increased child tax credit and minimal, if any,
income tax relief.
A married couple with
earned income of $20,000 has two children.
$20,000-$10,500=$9,500 times 10% = $950 or $475 per
child. The limitation is the lower of the $475 or
$600. Both under pre and post JGTRRA, the couple
falls short of the limitation of $600 per child. Thus
the current change in the tax law expanding the credit
from $600 to $1,000 doesn’t help or hurt this couple.
The law as proposed in
the Senate resolution would increase the limitation to
15% of your earned income in excess of $10,500 or
$1,000 whichever is lower. New calculation:
$20,000-$10,500=$9,500 times 15% = $1,425. The new
proposed limitation of $1,425 would give this couple
an additional $475 tax break.
The Senate resolution
also increases the income eligibility limit for
married individuals on the upper income limits.
The income eligibility
limit for married couples will remain at $110,000
until 2008 when the limit will increase to $115,000.
The limit will then remain at $115,000 until 2010 when
the limit will increase to $150,000. For a detailed
analysis of the phase-outs and political commentary on
how even the Senate resolution is regressive, please
see
www.cbpp.org.
Marriage Penalty
Income tax rates are decreased for married couples.
The standard deduction for married taxpayers is
increased from $7,950 to $9,500. For most of our
readers, this change will not have any impact because
you are currently itemizing your deductions. As with
most of the provisions, this relief is only
temporary. From a tax standpoint, it is probably wise
for those individuals “living together” to get married
now—but consider getting divorced in 2005, depending
on how much money you make and what happens with the
sunset provisions.
Things to Look Forward
To
Schedule of Tax Rates
and Other Information to Follow
We
will be following up this e-mail with a separate
e-mail containing the new rates and old rates as well
other important tax information. It is an update of
the extremely popular Jim Lange’s 2002-2003 Tax
Reference Card.
Upcoming Availability
of Cutting Edge IRA Strategies CDs and Tapes
On
another note, we are excited about our recent
workshop, Pay Taxes Later: Cutting Edge IRA
Strategies. We taped that session as well as
a series of related workshops and will be making CDs
and tapes available to our readers. The workshops
have information with the potential to significantly
increase your financial security and if followed,
almost certainly will have an enormous impact on the
quality of life for your family after you are gone.
The workshops are based on a lifetime of experience
and research, and my most valuable recommendations
have stood the test of peer review. We will be sending
out a pre-release special in the next several weeks.
I hope you will take advantage of it.
James
Lange is a tax attorney and CPA who provides specialized retirement and estate
planning services to same sex couples with significant retirement plan accumulations. He
has prepared over 450 simple and complex retirement and estate plans. These plans
include tax-savvy advice, will and trust preparation, and sophisticated beneficiary
designations for IRAs and other retirement plans.
You can contact Jim by phone at (800) 387-1129,
or (412) 521-2732, or by e-mail at admin@outestateplanning.com.
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