As we encounter the new year, we may want to review some the tax law changes that have been enacted during 2003. The Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law in May, 2003, and provides approximately $330 billion of tax cuts over the next ten years. This article is a summary of the details of the 2003 act and how it may affect the preparation of your personal and business income taxes.

Retroactive to January 1, 2003, rates in the top four brackets decrease by 2% or more. This is an acceleration of changes originally scheduled by the Tax Act of 2001. The new top tax rate is now only 35%, compared to 38.6% in 2002. The new tax brackets are 35%, 33%, 28%, 25%, 15% and 10%. The lower 10% and 15% rates have not changed. However, the upper end of the 10% bracket increases from $6,000 to $7,000 for single filers and $12,000 to $14,000 for joint filers. This change only applies to 2003 and 2004 tax years. The new law provides some relief from the alternative minimum tax, which hits an increasing number of middle income taxpayers each year. The exemption amount increases from $35,750 to $40,250 for single taxpayers, and from $49,000 to $58,000 for married couples. This increase is only effective for 2003 and 2004.

The new law provides some relief from the marriage penalty, a situation in which a married couple pays higher taxes than they would pay as singles with the same income. The law increases both the standard deduction and the 15% tax bracket for married couples filing jointly to twice that of singles. This marriage penalty relief is effective only for 2003 and 2004.

The law immediately increases the child tax credit from $600 to $1000 per child under age 17. Under prior law, the credit was slowly increasing upwards to reach the $1,000 level in 2010.

One of the biggest changes in the new law reduces the tax investors will pay on most dividends and long-term capital gains. The reductions apply to dividends received at any time during 2003 and long-term capital gains realized on or after May 6, 2003. Taxpayers in the top four tax brackets will pay 15% on most dividend income received through 2008. Taxpayers in the 10% and 15% ordinary income brackets will pay 5% until 2008, in which the rate will be 0%. Those same new rates will apply on most long term capital gains. Taxpayers in the top four brackets will pay 15%, which is down from the prior rate of 20%. For those in the lower two brackets, the rate drops from the 10% to 5% until 2008, in which the rate will be 0%. In 2009, these new rates on dividends and capital gains will expire unless extended by Congress.

The major change in the tax law regarding business investment is the increase in the Section 179 deduction. The prior law allowed businesses to make equipment purchases and directly write off the investment as accelerated depreciation up to $25,000. In 2003 through 2005, small businesses can take an immediate write-off for up to $100,000 of equipment purchases each year. This benefit begins to phase out when total purchases in any year exceed $400,000. The law also increases and extends the bonus depreciation that was introduced in the 2002 tax legislation.

Businesses can now claim a first year bonus depreciation of 50% of the cost of most new equipment purchased after May 5, 2003, and before January 1, 2005. The previous law allowed up to 30% between September 11, 2001 and May 6, 2003. This bonus depreciation only applies to new property only. The new Section 179 provision of up to $100,000, however, applies to new or used property and equipment. Also, the two benefits may be combined, as the expensing option can be taken for a purchase, and the 50% bonus depreciation can be used on the remaining basis if the property qualifies.

As always, call your accountant or tax preparer with any questions as to how these or other tax law changes will affect you.