the third largest tax reduction in our country's history. Since it is such a large tax cut, it will affect most Americans. The purpose of this article is to summarize the Act and examine its effects.
On Wednesday, May 28, 2003, President George W. Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act") into law. It has been reported that this Act is the third largest tax reduction in our country's history. Since it is such a large tax cut, it will affect most Americans. The purpose of this article is to summarize the Act and examine its effects.
Summary Of The Act
All of the tax cuts created by the Act involve income taxes. Transfer taxes, such as gift, estate and generation-skipping taxes, are not affected by the Act.
The Act changes the income tax system in several ways. First, the maximum child tax credit for 2003 and 2004 is increased from $600 to $1,000 per child. The amount of the increase ($400) for 2003 will be advanced to eligible taxpayers this year in the form of checks. However, in 2005 the child tax credit falls to $700 per child, as specified under the law prior to the Act.
Secondly, the Act lessens the effect of the so-called "marriage penalty." This is accomplished by making the standard deduction for jointly filing, married taxpayers twice the amount of the standard deduction for single taxpayers and by increasing the 15% tax bracket for jointly filing, married taxpayers so that it is double the 15% tax bracket for single filers.
A significant change made by the Act is the lowering of the four highest income tax rates. The 10% and 15% rates are not altered, but the 27% rate is lowered to 25%; the 30% rate reduced to 28%; the 35% rate goes down to 33%; and the 38.6% rate drops to 35%. The Act also provides some minimum tax relief to individual taxpayers.
All these amendments to the Internal Revenue Code, as they are significant, are only effective until December 31, 2010. After that date, the law in effect prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 goes back into effect.
The Act also reduces the tax rate on capital gains and dividends received by individuals. The 10% capital gains rate is lowered to 5% and the 20% rate reduced to 15%. Dividends are no longer taxed at ordinary income tax rates, but will be taxed at the 5% and 15% capital gains rates. However, these changes aren't permanent, either; they will expire after December 31, 2008.
The Act also contains income tax benefits for businesses. Specifically, the so-called "Section 179" expense amount is increased from $25,000 to $100,000 for tax years 2003 through 2005. Further, certain computer software will now qualify for the Section 179 expense. In addition, the 30% "bonus depreciation" deduction is increased to 50% for qualifying property acquired after May 5, 2003 (but not under contract to be acquired prior to May 6, 2003) and before January 1, 2005.
Finally, the Act contains some provisions granting fiscal relief to states for Medicaid and other government services and pushes the due date for the 25% required installment of corporate estimated tax back from September 15, 2003 to October 1, 2003.
What Do The Changes Mean To You?
Obviously, the child tax credit advance checks many Americans will receive will be a welcomed change. The recipients will be able to use this money for any purpose. However, this author suggests that parents consider depositing this money into education savings accounts for their children, such as Section 529 Plans. These Plans offer many tax benefits to the contributors and the beneficiaries. Plus, Illinois' Bright Start® Plan gives all Illinois contributors a tax deduction on their Illinois income tax return.
Another benefit the Act will provide is more take-home pay to working taxpayers. This will result from the decrease in the ordinary income tax rates, the increased standard deduction, and the larger 15% bracket for jointly filing, married taxpayers. The lawmakers believe that this will create more jobs by infusing more money into the economy. But as with most things, only time will tell if that is true. However, this author believes that if people have more money they will, as a whole, be more likely to invest that money - - especially given that the tax on investment returns (capital gains and dividends) has been lowered and the deductions allowed (50% bonus depreciation and Section 179 expense) for such investments have been increased. Of course, the investments made should be sound ones. Thorough analysis is important before making any decisions. Further, this author strongly recommends that the appropriate professionals be employed before making any investment decisions.
Remember that many of the tax cuts in the Act are only temporary and will expire in a few years. All taxpayers are encouraged to take advantage of them now, because the future is uncertain.
About the Author
Ted Koester is an Associate Attorney with The Law Offices of Marc J. Lane, a Professional Corporation. He received a Bachelor of Science from Eastern Illinois Univerity and his Juris Doctorate from Seton Hall University. Mr. Koester was admitted to the Illinois Bar in 1998. He practices in the areas of estate planning, tax law, and business law. Ted is a member of the Chicago Bar Association where he serves on the Trust Law Committee, the Corporation and Business Law Committee, the YLS Corporation Practice Committee, and the YLS Estate Planning Committee. In addition, Ted is a member of the Illinois State Bar Association and its Business Advice and Financial Planning Section and Trusts and Estates Section. He is also a member of the American Bar Association.