To Our Clients and Friends:

The Summer 2003 Tax Client Newsletter will bring you up-to-date on a number of important tax law changes for 2003. As a result of mean­ingful 2003 tax legislation, there are a number of significant tax law changes affecting you this year and right now.

You may be aware through media attention that many of the important tax law changes are scheduled to sunset" (go away) at various dates. Since this issue is of concern to so many taxpayers, we are enclosing a handy reference chart on the last page of this newsletter. You should think of the "sunset" issue as a future concern and take advantage of the opportuni­ties that you have today.

If you have any questions concern­ing any of the information being reported on in this Newsletter, please contact my office to schedule an appointment.

2003 Tax Law Changes

With the stroke of his pen, President George Bush signed (May 28) into law the Jobs and Growth Tax Relief Reconciliation Act of 2003. The new law contains $330 billion worth of tax cuts.

The 2003 tax act appears to offer something for almost everyone.

Tax Brackets Reduced

One of the most significant features of the legislation is the lowering of income tax brackets effective for 2003. The 2001 Economic Growth and Tax Relief Reconciliation Act pro­vided that individual marginal tax rates gradually decline over several Years. The 2003 legislation acceler­ates the reductions. The new tax rates/brackets are:

 Now                 Was

 35%                38.6%

33%                35%

28%                30%

25%                27%

15%                  15% (no change)

10%/e               10% (no change)

 Note: Rates are retroactive to January 1. 2003.

 10% Bracket Expanded

Single taxpayers with taxable income over $6,000, or a married couple with taxable income over $12,000 (head­-of-household remains at $10,000), will benefit from the acceleration of' the expansion of the 10% bracket. Under the 2001 legislation, the 10% bracket was scheduled to increase to $7,000 for singles and $14,000 for joint filers in 2008.

The 2003 legislation expands the 10% tax bracket now and the expan­sion is effective for tax years 2003 and 2004. In 2005, the thresholds revert back to $6,000 and $12,000 respec­tively and remain there until they are bumped up again in 2008. The 10% tax bracket amounts are adjusted for inflation in 2004 and then again in tax years beginning after 2008.

 Marriage Penalty Relief

The new tax law changes the so­ called marriage penalty rules of the tax code. The marriage penalty is a feature of the tax code that, in some cases, leaves two working spouses worse off taxwise than they would be as singles. The marriage penalty comes about because some features of the tax laws don't always double for married couples.

For 2003 and 2004, the new law makes the standard deduction for married taxpayers filing jointly twice that of singles: $9,500 for the mar­ried couple filing, jointly and $4,750 for single taxpayers.

The new law expands the 15% tax bracket for married couples filing jointly to double that of single tax­payers. The expansion of the 15% bracket to eliminate potential mar­riage penalties benefits all joint filers with income over $47,450, though some marriage penalty kicks in again for married couples starting above $114,650 in income.

After- 2004, both the standard deduction and the 15% rate bracket expansion provisions "sunset," mean­ing that the rules go back to the 2001 standards unless Congress decides to re-enact the changes.

 Investors Win: Lower Capital Gains Rates

Investors come out a very big winner under the 2003 tax bill. The top capital (rains rate will fall from 20% to 15%. The lowest capital gains rate will decrease to 5% from 10%. Note that the lower rates are effective for transactions after May 5. 2003. The lower rates are scheduled to expire after 2008.

The paperwork on capital gains for 2003 has the potential to be a night­mare and our office is here to assist you with this project. Long-term gains on sales made through May 5 will be taxed at up to 20% or 10% where sales made after May 5 will be taxed at 15% or 5%. There is no increase to the $3,000 annual limitation on deducting excess capital losses.

Taxpayers in the lowest two brackets (10% and 15%) will he a one-year bonus in 2008 when they will pay no federal taxes on capital gains. The tax is reinstated after 2008.

 Investors Win: Dividends Taxed at 15%

Dividend income is currently taxed as ordinary income. Under the 2003 tax legislation. the top dividend rate is lowered to 15%. Taxpayers in the lowest two tax brackets will pay 5%. This is a very significant change when you consider the fact that the current top rate for dividends is 38.6%. The new lower rates are effective for qualified dividends received after December 31, 2002. That's right - all qualifying dividends received this year will be taxed at the lower rates of 15% and 5% respectively.

Taxpayers in the lowest two brackets will get a one-year bonus in 2008 when they will pay no tax on dividend income. The tax is reinstated after 2008

 Families Win: Child Tax Credit Increased

The child tax credit has been increased from the current $600 to $1,000. As a result some 24.4 million families are eligible to receive a $400 rebate check this summer. The Treasury Department and the IRS will rely on data in the system from 2002 tax returns. Taxpayers and their tax professionals are not required to take any additional steps to receive the checks. Of course there is one exception - if' a taxpayer hasn't filed (on extension) their 2002 federal tax return it might be in their best interest to do so in order to get their tax data and eligibility into the system. Taxpayers will receive a letter from the government in advance of the checks. The direct deposit option isn't available - the checks must he mailed.

Parents, who give birth or adopted a child in 2003, will have to wait until they file their 2003 tax return to claim the full $1,000 credit.

The child tax credit phases out for married couples that earn more than $110,000 in AGI and single parents whose AGI exceeds $75,000.

Unless this increase in the child tax credit is extended by Congress, the credit will drop back to $700 in 2005 and 5500 in 2011. After 2005, the credit will slowly build hack up to $1,000 before falling to $500 in 2011. Talk about confusion.

The first round of rebate checks were nailed on July 25. The remaining checks were received in early August. The idea was to have eligible taxpayers receive the funds ASAP and with any luck spend the money and in the process stimulate the economy. That's the congressional game plan.

Not everyone with children will receive the rebate checks. An estimated 6.5 million minimum-wage families were excluded from the benefit due to the fact that "they do not pay or owe taxes." This statement is very misleading since they do in fact pay a variety of taxes - just not the right ones for the child tax credit. While it is reasonably anticipated that Congress will correct this perceived injustice. the Senate, President Bush and the House appear to be at odds on how to resolve the issue. Congress left for its summer recess without making any progress on this issue.

On June 5, 2003, the U.S. Senate, in record breaking time. voted (94-2) to make the child tax credit advance payment available to an additional 6.5 million taxpayers. President Bush is on record as supporting the extension. This issue has the potential to have serious political implications and the strong Senate vote illustrates that fact. The battle to expand the child tax credit is taking place in the House of Representatives.

 Tax Breaks for Businesses Included in 2003 Tax Law

Continuing with the theme that the Jobs and Growth Tux Relief Reconciliation Act of 2003 offers something for almost everyone, the law increases the amount that business can "expense" or immediately write off, from S25,000 to $100,000. For 2003 through 2005, firms that put less than $400,000 of assets in use in a year can expense up to $100,000 of the cost in lieu of depreciation. The trigger point of the investment limita­tion phase-out increases from $200,000 to $400,000. The dollar limitations will he indexed for infla­tion during 2004 & 2005.

The increase in the so-called expensing deduction has the potential to assist businesses while also serving to stimulate the economy. The business community can be expected to leverage the available tax incentive.

Bonus depreciation is increased from 30% to 50% for post-May 5, 2003 acquisitions. The type of proper­ty that qualifies for this special allowance is unchanged from existing law. For the 50% allowance to apply. the property must be acquired after May 5, 2003, and before January 1, 2005. Note that if a binding contract to acquire the property was in effect before May 6, 2003, the property does not qualify for the 50% bonus depre­ciation (30ci% may be available). Taxpayers may elect out of bonus depreciation.

 Conclusion

The 2003 Tax Act is a bumpy series of starts and stops in some cases accelerating for brief periods some provi­sions of the 2001 Tax Act, providing short-term business investment incen­tives, and dramatically reducing income tax rates on capital gains and dividends for a short period of time. As always your individual focus should be on how the tax law changes affect you and how the tax law changes may benefit you.

Thank you for reviewing the Summer 2003 Tax Client Newsletter and for the opportunity to serve as your tax professional.

      

Jobs and Growth Tax Relief Reconciliation Act of 2003
Understanding the Numbers

1. The lower rates for long-term capital gains are for transaction on or after May 6, 2003.

2. The 50% rate for first year bonus depreciation is for qualifying property purchased on or after May 6, 2003.

3. The 30% rate for first year bonus depreciation is for qualifying property purchased before May 6, 2003.

4. Certain items on the chart will be subject to a cost-of-living adjustment.

5. The assets held for > 5 years rule comes back in 2009.