2003 Tax News
(See other tax news: 2005,  2004 or 2002)

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Jobs and Growth Tax Relief Reconciliation
Planning now to save on year end taxes
Year End Tax Planning Strategies
Open a solo 401(k) plan
Begin required retirement plan distributions
Pay attention to mutual fund distributions
Review investment gains/losses
Bunch deductions
Consider charitable deductions
College-bound strategies.
ege-bound strategies.

President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 on May 28, 2003.

To assist you in understanding what is included in the new law, Jobs & Growth Tax Relief Reconciliation Act of 2003, highlights of the provisions are as follows:

A. Individual Provisions
1. Child Tax Credit
The child tax credit increases from $600 to $1,000. This will be effective for the years 2003 and 2004. The increase will be paid in advance starting in July for those who filed a 2002 tax return. In 2005, the child tax credit is scheduled to fall back to $700.

2. Marriage Penalty Relief (for taxpayers claiming the standard deduction)
In 2003 and 2004, the standard deduction for married couples will double to twice the amount of the standard deduction for single taxpayers. For 2003, the standard deduction for single taxpayers remains at $4,750. The standard deduction for married taxpayers will rise to $9,500.

3. Tax Brackets
New tax rates, retroactive to January 1, 2003 are 10, 15, 25, 28, 33 and 35 percent for individuals.

4. Capital Gains Rates
The maximum capital gains tax rate drops from twenty percent (20%) to fifteen percent (15%). The current 10 percent tax rate for lower income taxpayers drops to five percent (5%). This applies to capital assets that are held more than one year and sold or exchanged at a gain on or after May 6, 2003 and before January 1, 2009. The lower rates would apply to both regular tax and the alternative minimum tax.

5. Alternative Minimum Tax (AMT)
For 2003 and 2004, the AMT exemption is increased to $58,000 for married taxpayers add to $40,250 for unmarried taxpayers. This provision protects taxpayers that would be subject to the AMT due to the newly lowered regular tax rates.

6. Dividend Tax
Dividends received by an individual from domestic and qualified foreign corporations are eligible for the following tax break:
The amount of tax that is levied on an individuals qualifying
dividends is fifteen percent (15%) (five percent for taxpayers
in the ten and fifteen percent brackets).
This provision is retroactive to January 1, 2003 and terminates
on December 31, 2008. The five percent (5%) rate terminates
on December 31, 2007 and falls to zero percent (0%) for 2008.

B. Business Provisions
1. Bonus Depreciation
The additional thirty percent (30%) bonus depreciation increases to fifty percent (50%) for qualifying property placed in service after May 5, 2003 and before January 1, 2005. The new law increases the bonus depreciation amount for automobiles from $4,600 to $7,650.

2. Section 179 Expensing
For 2003, taxpayers can expense up to $100,000 in qualifying property. The phase-out threshold increases from $200,000 to $400,000. For 2004 and 2005, this amount will be indexed for inflation for 2003-2005, taxpayers can expense off-the-shelf computer software under Section 179.

Planning now to save on year end taxes
Although few of us have taxes on our minds at this time of year, ADVANCE PLANNING is essential in optimizing your company's tax situation. The end of the year is fast approaching-and so are several important December 31 financial deadlines.

Year End Tax Planning Strategies
Convert to a Roth IRA. With many individual retirement accounts decimated by the bear market, taxpayers may find this the perfect time to convert their traditional individual retirement accounts to a Roth IRA, whose eligible earnings are not taxable upon withdrawal. Because you pay regular income taxes on the money shift to a Roth, the idea is to convert the smaller pool of assets into a Roth before the assets rebound value.

Furthermore, taxpayers who couldn't qualify for a Roth conversion before because their income was too high (over $100,000 for couples and singles) may qualify now if their income is down for the year. You must take the money out of the traditional IRA by December 31. The hitch to all this? It's better to pay for the conversion taxes with money outside of the IRA--potentially difficult in a bear market.

Open a solo 401(k) plan.
The self-employed and business owners with no full-time paid employees should consider opening a solo 401(k). The 2001 Tax Relief Act made changes to 401(k) plans that make individual 401(k)s cost effective for the first time. Participants can now sock away up to $41,000 to be put into these accounts in 2002, far more than alternatives such as the SIMPLE IRA or SEP IRA. For 2002, the 401(k) must be opened by this December 31 if you follow the calendar year.

Begin required retirement plan distributions.
Did you turn 70 ½ before July 1 this year? You're required to start taking minimum distributions by December 31 from your traditional IRA and employer-sponsored retirement plans (except for the plan of your current employer if you're still working). Technically, you can delay the initial distribution to April 1 of next year, but that means you'd have two required withdrawals next year because all subsequent withdrawals must be completed by December 31. Two minimum distributions in the same year could push you into a higher tax bracket and potentially expose more of your Social Security benefits to tax.

Pay attention to mutual fund distributions.
You could face the irony of paying taxes on capital gains distributions made by your taxable mutual funds even though the funds lost money for the year. If it's a fund you want to sell anyway, consider selling it before the "ex-dividend" date, which commonly is in November or December. Equally, if not more important, avoid buying into funds before they make their distribution, otherwise you're paying taxes on gains you never earned.

Review investment gains/losses.
Now is the time to consider selling losing investments to offset those scarce investment profits you made in 2002, or selling profitable investments so they are sheltered by losses you've already realized (and perhaps rebuying those profitable assets if it makes investment sense.) If you don't have profits to offset, you can use losses to offset regular income up to $3,000 (the excess losses carry into future tax years.)

Bunch deductions.
A time-honored tax strategy is to bunch deductions into a sngle year. For example, you might accelerate payment of your second installment of property taxes due next spring into this year. The same for next January's payment for estimated taxes. Bunching elective medical expenses such as orthodontia bills also might push your total medical deductions over that often difficult to hurdle 7.5 percent threshold.

Consider charitable deductions.
Consider increasing charitable contributions in higher income years, or delaying the donation of investments until they regain some of the appreciation they have lost--you'll receive a larger deduction when you do. (Better to donate appreciated assets rather than selling them first.)

College-bound strategies.
Families may want to postpone into 2003 the receipt of income such as bonuses if they will be applying for financial aid in 2003 (the aid would be calculated on the family's 2002 income.) Or they may want to accelerate income from 2003 into 2002 if they anticipate applying for aid in 2004 (which would be based on 2003 income).

 

See other tax news: 2005,  2004 or 2002