Here is a plain-language run-down of the most important features in the
new tax law President Bush signed for 2003.
Let us here at JS+A know if you have questions about the law or how it
applies to you.
RATES LOWERED
Your tax rates will be lower in 2003 than they were in 2002. The more you
make, the bigger the benefit. If your top rate was 38.6%, it will be 35%.
If your top rate was 27%, it will be 25%. More low-income people will pay
zero tax...
CHILD CREDIT GROWS; CHECKS ON THE WAY!
Most people with kids will get $1,000 per kid off their tax bill. Last
year this amount was $600 per kid. If your income is above $110,000 for
married couples or $75,000 for single parents, the credit gets shaved
down.
To stimulate the economy, the IRS will be sending rebate checks to
parents based on their 2002 tax returns. Fun!
And confusing: we will need to keep track of the rebate checks, so that
we can report any under or overpayment on your 2003 tax returns. PLEASE
KEEP REBATE-RELATED PAPERWORK WITH YOUR TAX RECORDS!
MARRIAGE COUNSELING: TAXES SHRINK FOR MARRIED VS. SINGLE
The tax tables have been tweaked so two people filing jointly should pay
about the same tax as two single people who make about the same amount of
money. For some, this has not been the case. The adjustment is not
complete, and, frankly, it will hurt some people while helping others.
NEW WITHHOLDING AT WORK; MORE TAKE HOME PAY
Look for a change in your take home pay as new withholding tables go into
effect in the coming weeks. NOTE: The new withholding will be based on
2003 rates going forward; you might consider increasing your exemptions
for the rest of the year, to make up for the fact that your withholding up
to now has been excessive in light of the new rates.
DIVIDEND AND CAPITAL GAINS TAX RATES FALL
Taxes on most long-term capital gains will be 15% for sales made after May
5, 2003. Before then, such sales are taxed at 20%.
In addition, dividends paid from US companies and some foreign
companies traded on US exchanges in 2003 will be taxed at 15%. This is a
big drop! The decrease will apply to some mutual fund dividends.
Important: you have to hold the dividend-paying stock for at least 60
days around the dividend date to qualify for the lower rate. So it will
not avail to trade in and out of stocks just as they are about to go
ex-dividend.
Low income individuals will pay only 5% tax on such income. HINT:
transfer appreciated property to your low-income kid - so long as she is
over 13, she will pay 5% tax when she sells!
Short term capital gains will still be taxed at your ordinary income
rates.
Certain other capital gains will be taxed at 14%, 25% or 28%. Wow!
Filling out Schedule D is going to be quite involved this year.
DEEMED HEADACHE
The 18% rate on assets held over 5 years has been
repealed. Some of us paid capital gains tax in 2001 at 20% on so-called
"deemed sales" to take advantage of this law which is now kaput. Perhaps
the IRS will make it possible to revoke the deemed sales...
TAX PLANNING WITH NEW DIVIDEND RATES
Whether your business should be an S Corporation or C Corporation depends
in part on the new rates. There may be planning opportunities here! Look
for more guidance from me on this later on; let me know if you want us to
assess your current business tax strategy soon.
Also: tax-free bonds just got a little less desirable - why take a
lower interest rate for tax free bonds when you can get a higher rate of
interest at 15% tax? Look for muni rates to rise a bit to balance this
difference...
WHAT ABOUT MY SEP OR SIMPLE OR IRA OR 401(K)?
The lower dividend and capital gains tax rates mean DIDDLY when applied to
shares owned in a tax-favored retirement account. After all, we don't pay
tax on dividends received within such accounts. (Technically, in fact, the
change makes IRA savings a little LESS appealing. That's because we have
to pay tax at ordinary rates - not the new 15% rate - when we take money
out of a retirement account. This is no excuse not to save for retirement,
however!)
ALTERNATIVE MINIMUM TAX STILL LURKS
The break in capital gains and dividend tax rates apply for purposes of
the gnarly separate tax regime known as the Alternative Minimum Tax.
Congress also raised the threshold at which this tax kicks in - a bit.
BUSINESS SAVINGS - WRITE OFF MORE GEAR!
Small businesses can write off the full cost of up to $100,000 of new gear
in 2003! Any amount above that must be depreciated. Software is included
for the first time in this category of purchase.
Amounts ineligible for such write offs can be depreciated faster than
ever: 50% of the cost of stuff bought after May 5 can be written off; the
rest spread out over 5 or 7 or 39 or whatever term of years. Before May 6,
30% can be written off.
Real estate cannot be written off so quickly...
SHOULD I RENT TO MY CORPORATION?
Probably. But the advantages of doing so have shrunk: dividends paid by
your corporation are taxed at 15%. Rent paid by your corporation are taxed
at your regular income tax rates - which will be higher. (But you can take
deductions against rent which you cannot do against dividends).
STATE TAXES: SPOILING THE PARTY
Meanwhile, states have to raise taxes. They cannot run big deficits, as
the Federal government certainly will do as a result of these tax changes.
Massachusetts has RAISED taxes: long-term capital gains are now to be
taxed at 5.3%, regardless of how long you held the investment. Your
personal exemption from Massachusetts taxes has FALLEN, thus raising your
taxable income. Fees have risen; we expect sales taxes will as well.
HELPING PAY FOR THAT FORD EXPLORER - AND THOSE
SAUDI PALACES
Congress has made behemoth SUVs eligible for bigger-than-ever depreciation
deductions. This applies to vehicles with a gross weight in excess of
6,000 pounds. Good for Detroit - and OPEC!