With his signature, President George W. Bush ushered into law another round of tax cuts. This $350 billion tax reduction will have the greatest impact on taxpayers with children, but there is a little something in the bill for just about everybody, businesses included. Here are the highlights.
Child tax credit
The child tax credit will be increased for 2003 and 2004 to $1,000 per qualifying child. This is an acceleration of the credit that was scheduled to phase in over several years. But, as with the old law, this provision isn't permanent. In 2005, the credit amounts will revert back to prior law. Unless acted on by the Congress before that time, a $700 credit will apply in 2005-2008, $800 for 2009, and $1,000 in 2010 and thereafter.
In order to get this tax credit into the hands of the spending public, the law provides that advance payments in the amount of $400 per qualifying child will be mailed out beginning in July. These payments will be an advance against your 2003 taxes, and will need to be reconciled on the 2003 tax return. So if you're one of the folks receiving this $400 payment, make sure to keep good records.
These payments will be based on information that the IRS has in its system for the 2002 tax year. So if you receive a $400 advance payment check for a child that doesn't qualify for the credit in 2003, you'll have to give it back when you prepare your 2003 return. If you have a child that qualifies for the child tax credit in 2003 but didn't qualify in 2002 (such as a baby born in 2003), you'll not receive a $400 advance payment. Instead, you'll receive the benefit of the full credit when you file your return. To learn more, check out the information on the credit and the advance payments at the IRS website.
Marriage penalty relief
You would expect the level of income that puts a married couple into a certain tax bracket would be twice the income that puts a single person in that same tax bracket. But that hasn't been the case, which is one of the culprits behind the so-called marriage penalty. But now, thanks to latest tax law, that incongruity has been rectified, but only for those in the 15% bracket.
Another aspect of the marriage penalty is that the standard deduction for married people is not twice that for single people. At least that was the case. The new law puts single and married taxpayers on the same playing field, at least as far as the standard deduction is concerned.
10% bracket increase
The new law allows for the increase of the 10% bracket level to $14,000 for married taxpayers. The 10% bracket level will remain at $10,000 for head of household filers, and will increase to $7,000 for other folks. In other words, more people will be able to take advantage of the 10% tax bracket, thereby lowering taxes.
Tax rate reduction
The new law also enacts new tax brackets for 2003 that originally were scheduled to phase in for tax year 2006. In effect, we now have the following tax brackets for 2003: 10%, 15%, 25%, 28%, 33%, and 35%. Because of these bracket changes, the IRS has issued new tax withholding tables, and has mandated that these tables be used as soon as possible, but not later than July 1, 2003. Because of these rate changes, you'll soon be seeing more moolah in your paycheck.
Increased bonus depreciation
The old 30% bonus depreciation increases to 50% for qualifying property. Generally, the following criteria must be met:
- The property must be acquired after May 5, 2003, and before Jan. 1, 2005.
- The property is new.
- The election is made to use the 50% bonus depreciation.
The old 30% bonus depreciation is still available to taxpayers who find it more advantageous to use the old 30% rate.
Increased depreciation expensing (Code Section 179) election
The expensing limit is increased to $100,000 of qualifying property for tax years 2003 to 2005. Additionally, "off the shelf" computer software is now included as qualifying property, and is available for this expensing provision in 2003.
Capital gains tax reduction
The 10% capital gains rate is reduced to 5% and will be reduced to 0% in 2008. The 20% rate is reduced to 15%. The new law eliminates the 8% and 18% rates for qualified five-year gains (called the "superlong-term" rates). This provision is effective for taxable years ending on or after May 6, 2003, and beginning before Jan. 1, 2013. Gains realized prior to May 6 (such as installment sales) will generally be taxed at the then-existing rates, and only new gains will be taxed at the new, lower rates.
Dividend tax reduction
Dividends will be combined with your net capital gains and will be taxed at the new capital gains rates. This is a bit of a complicated provision, with a number of exceptions and special rules. Basically, your dividends will be taxed at a maximum rate of either 5% or 15%, depending on your other income and where you fall in the "normal" brackets. (For more, read The New, Lower Tax on Dividends.)
While there are other provisions dealing with corporation estimated taxes, alternative minimum taxes, and temporary state fiscal relief, the above are the major provisions affecting the vast majority of us. And just how much will we be affected? The folks at H&R Block (NYSE: HRB ) estimate that if you're a single taxpayer with $30,000 of income, your savings will be only about $50. But if you're a married couple with two children at a $50,000 income level, your savings will amount to about $1,133!
Whatever your status, make sure that your withholding and estimated taxes are in line with your new tax situation. You certainly don't want to have Uncle Sam holding on to too much of your money. So check your withholding status and see if you need to tinker with it in order to reduce your refund at the end of the year -- and put more money in your pocket now.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.