Much has happened that will affect the preparation of your 2003 income tax return. Many provisions of the Jobs & Growth Tax Relief Reconciliation Act of 2003 became effective immediately, and the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Job Creation and Workers Assistance Act of 2002 "phased in" various changes to your 2003 return.
Can you say "Tax simplification"? I didn't think so.
Nevertheless, all of these legislative gems have some impact on taxes, and there are literally dozens of brand-new provisions that kicked in last year. Let's take a look at a few of the major changes.
1. Reduced tax rates. The rate reductions that were scheduled to phase in with the implementation of the 2001 tax act were sped up. For 2003, tax rates have been reduced as follows:
- 27% reduced to 25%
- 30% reduced to 28%
- 35% reduced to 33%
- 38.6% reduced to 35%
2. Fatter child tax credits. The child tax credits that were scheduled to max out in 2010 were also sped up. For 2003, the maximum credit for a qualifying child is $1,000. There are no new forms to report your credit. Instead, report your credit computation on line 49 of Form 1040 or line 33 of Form 1040A. If you qualify for the credit, don't file Form 1040EZ, since it's not available to you on that form. If you received an advance child tax credit payment last summer in the amount of $400 per qualifying child, you'll have to reconcile the new $1,000 credit with the $400 that you already received by completing a worksheet found in the 1040/1040A package.
3. Lower tax on dividends. You'll still report qualifying dividends on Schedule B as you've always done. But the kicker is that in order to receive the correct lower rate on your dividends, you'll need to complete the Schedule D worksheet. Did you think that Schedule D was only to report gains and losses from the sale of stocks and other capital assets? Not any longer.
The really odd thing, however, is that if you have qualifying dividends, but no capital gains or losses, you'll still compute your tax using the Schedule D worksheet, even though Schedule D isn't attached to the tax return. Wow. Make sure to read the instructions for Form 1040, line 41 or Form 1040A, line 28 very carefully. And if you have qualifying dividends, forget filing Form 1040EZ, since that form isn't made to handle the receipt of dividends, qualifying or otherwise.
4. Lower tax on capital gains. You'll still report your gains and losses on Schedule D, and use the Schedule D worksheet to compute the lower taxes on your long-term capital gains (and qualifying dividends). So again, if you have either long-term gains or qualified dividends, make sure that you carefully read the instructions for line 41 of Form 1040 or line 28 of Form 1040A. And forget Form 1040EZ since you can't report gains there.
5. Child care credit increased. The cost of child care is higher than ever. At least Uncle Sam provided an increased child care credit for 2003. You can now claim a credit of up to $1,050 for one child and $2,100 for two or more children. But remember that this credit is on a sliding scale: the greater your income, the lower the credit. So if you pay child care allowing you and your spouse to work, make sure to check out Form 2441.
6. Self-employed health insurance. If you're self-employed and pay qualified health-insurance premiums, you will find a nice surprise on Form 1040, line 28. For 2003 you may be eligible to deduct 100% of your qualified health-insurance premiums (up from 65% last year).
7. Lifetime learning credit doubled. The maximum Lifetime Learning Credit for 2003 is increased to $2,000 (up from $1,000 last year). You'll claim the credit on Form 8863. Uncle Sam is big on education deductions and credits, so make sure you don't overlook them.
8. Retirement savings contribution credit. If you contribute to an IRA (either traditional or Roth), SEP, 401(k), 403(b), or virtually any other qualified pension plan, make sure to check out IRS Form 8880. Depending on your income level, you might receive an additional credit against your taxes. And, by the way, it's not too late to make a 2003 contribution to your IRA. Visit our IRA Center for more information.
9. Additional depreciation deductions. IRS Form 4562 (the form used to report business depreciation) has a new look to it. It was revised in order to provide for the new depreciation deductions allowable for small-business owners. It can get very complicated, especially if you're not familiar with the depreciation rules. But it's well worth your while if you have a small business and purchased office equipment, machinery, or even an auto in 2003.
These are only a few of the changes that you'll run across when you begin to file your 2003 return. It's much more difficult than just sitting down and filling out a few forms. There are many available deductions and credits that might be overlooked if you're not using the correct form or worksheet.
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.