By Rhonda L. Russell, CPA/PFS
With C. Marie Swift
Rhonda L. Russell, CPA/PFS is principal of Rhonda L Russell,
PC, a financial planning and registered investment advisory
firm, and a shareholder with Doshier, Pickens & Francis,
PC, Certified Public Accountants in Amarillo, Texas. A
biography on Ms. Russell may be viewed by visiting www.dpfcpa.com.
C. Marie Swift is Director of Corporate Communications
for The Garrett Planning Network, Inc., a nationwide network
of Fee-Only financial planners dedicated to serving people
from all walks of life on an Hourly, As-Needed basis. For
more information, please visit www.GarrettPlanningNetwork.com.
The Jobs and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA) was signed into law May 28, 2003. Due to the ongoing
political debate about the cost of the tax reductions,
many of JGTRRA’s changes are temporary. Some expire
as soon as 2004. Some expire and return to the scheduled
changes under the previous tax act, EGTRRA. Others extend
out to 2011. The net effect is a roller coaster of rate
and other changes.
Tax Changes Overview
JGTRRA reduces tax liabilities in a number of areas for
individuals and small businesses. It is important for
you to understand how the new laws may affect your tax
and financial planning.
Your personal tax and financial planning could be impacted
in several ways:
- Reduced personal income tax rates
- Reduced capital gains tax rates
- Reduced taxes on corporate dividends
- Increased standard deduction for “married filing
- Increased child tax credit
- Increased exemptions for Alternative Minimum Tax calculation
Reduced Personal Income Tax Rates
The personal income tax rate reductions originally scheduled
by the 2001 tax law have been accelerated. As you can see
in the table below, the marginal tax rates on the top four
income brackets drop by at least 2%. The tax rates for
the lower two income brackets remain unchanged. These new
rates are scheduled to return to their pre-2001 rates after
2010, unless the Sunset Provisions in the law are repealed.
The changes below are retroactive to January 1, 2003.
*The new law raised these bracket thresholds. They were previously $6,000 and $12,000 respectively.
Why is this important for your investments?
- Your tax bracket helps determine the relative value of
one investment over another and, the timing of when to
liquidate an investment or take a withdrawal from a retirement
- Interest income and dividends from real estate investment
trusts are now taxed at your income tax rate.
- The decrease in personal income tax rates may make tax-free
bonds less attractive and give an edge to higher-yielding
- It may be advisable to decrease the amount withheld from
your paycheck and use the funds to invest in an IRA, SEP
or a 401(k) if available. By increasing your retirement
account contributions, you are maximizing available tax
Reduced Capital Gains Tax Rates
The adjustment of capital gains taxes under JTGRAA is
more complicated. The new law reduces capital gains tax
rates but applies only to assets sold after May 5, 2003.
Assets sold before that date fall under the old capital
gains rates. Under the previous law, long-term capital
gains (on assets held over one year) were taxed at either
20% or 10%, depending on your income. Those capital gains
tax rates are immediately lowered to 15% and 5% respectively.
For those in the lower (10% and 15%) income tax brackets,
the capital gains rate is lowered to 5% through 2007, and
drops to zero percent in 2008, but just for one year. As
currently scheduled, in 2009 the capital gains rates will
return to the old 10% and 20% levels unless the Sunset
Provisions are repealed.
Investment implications: The spread between the top income
and capital gains tax brackets has increased, thus making
capital gains investments more valuable to those in the
higher brackets. Holding investments for at least one year
to get long-term capital gains is more rewarding than ever;
excessive turnover is not. With less turnover, we could
also see less market volatility in growth-type stocks.
For college funding, it may make sense to give appreciating
assets to children approaching college age or to elderly
relatives you are supporting. They can sell the assets
and then pay capital gains taxes at a lower rate than you
The May 6 effective date (remember, the new capital gains
law applies only to assets sold after May 5, 2003) will
add complexity to returns, and the IRS is already anticipating
a larger number of errors on 2003 returns due to additional
lines and calculations being added to several schedules
and worksheets. As always, it will be important to keep
good records, with special attention to dates of transaction.
Also, the capital gains rate cuts are not across the board.
Capital gains rates for some assets, such as collectibles,
remains at 28% and “unrecaptured Code Sec 1250” gain
is subject to a maximum 25%. The five-year property rate
is gone for now. This may be problematic for those who
made a “deemed sale election” in 2001 to qualify
for the 18% rate, paying tax on the pre-2001 appreciation.
Reduced Taxes on Corporate Dividends
Dividends will be taxed at a 15% maximum rate. This applies
to most dividends from a domestic or qualified foreign
corporation. This is important because some corporations
had just started paying their first-ever dividends in 2002.
Reducing the taxes on corporate dividends may now serve
to accelerate the trend of dividend payouts. As is currently
the case, dividends, interest and capital gains within
an IRA, 401(k) or annuity will continue to grow tax-deferred
(in the case of a Roth IRA dividends, interest and capital
gains are tax-free).
Increased Standard Deduction for Joint Filers
The standard deduction for married couples doubles immediately
to twice the amount of the standard deduction for single
taxpayers, but only for 2 years (the 2003 and 2004 tax
years). In 2005, the standard deduction falls to 174 percent
of the standard deduction for single taxpayers, and then
begins gradually rising each year until it is again double
the amount in 2009. This might influence a couple’s
decision whether or not to itemize deductions or use the “bunching
technique” to alternate between itemized and standard
Increased Child Tax Credit
The child tax credit for 2003 is $1,000 per qualifying
child (a $400 increase over the prior law). What’s
more, the increased amount will be paid “in advance.” Beginning
in mid-July, taxpayers who filed their 2002 income tax
returns by April 15 and who had “qualifying” children
will receive a check from the IRS totaling $400 per child
(based on the 2002 tax return information). (Those who
file after April 15 will receive their child tax credit
advance payment check within about six weeks of the IRS
receiving the tax return.) These child tax credit payments
will be treated as advance rebates against any tax liability
in your 2003 income tax return. The new law does not change
the income levels at which the child credit starts to phase
out – $75,000 for singles, $110,000 for married couples,
and $55,000 for those who are married filing separately.
Increased Exemptions for the Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) was passed by Congress
to ensure that all taxpayers pay at least some tax. Though
intended to apply to high-income taxpayers who are able
to reduce their taxes through a variety of sophisticated
tax-reduction strategies, the AMT could affect middle-income
taxpayers who do not do sufficient tax planning. For example,
anyone who has received Incentive Stock Options (ISO’s)
could be affected by the AMT.
The AMT uses a separate tax calculation, done differently
from the regular tax calculation. The alternative minimum
tax itself is payable only if the calculated liability
under AMT is higher than the calculated tax liability using
the regular tax computation method. The new law reduces
the impact of the AMT by increasing the maximum personal
exemption under an AMT calculation to $58,000 for married
couples filing jointly (a $9,000 increase), to $40,250
for unmarried individuals (a $4,500 increase) and to $29,000
for married individuals filing separate returns (a $4,500
Under JGTRRA there are other tax-law changes; however,
space does not permit us to discuss them all here. This
would be an excellent time to meet with your tax professional
and/or financial advisor to adjust your estimates of
taxes due and to learn how other provisions may affect
you. As always, planning pays off!