By Jeremy M. Welch
May 30, 2003
On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “Act”). The Act provides a tax cut package of $350 billion and contains no provisions for raising revenue. Outlined below are several key provisions for investors and businesses.
Reduction in Ordinary Income Tax Rates for Individuals. The Act reduces certain individual tax rates effective January 1, 2003. The new reduced rates are 25%, 28%, 33%, and 35%, replacing the old rates of 27%, 30%, 35%, and 38.6%. These rate reductions will benefit single taxpayers with a taxable income in excess of $28,400 and married taxpayers with taxable income in excess of $47,450. In 2010 these rates will revert back to the rates in effect in 2001.
Reduction in Tax Rates on “Qualified Dividend Income”. The Act reduces the rate of tax which individual shareholders will pay on “qualified dividend income” to a maximum of 15%. In addition, for taxpayers in the 10% or 15% ordinary income tax bracket, the rate on qualified dividend income is reduced to 5% until 2007 and will be zero for 2008. These new tax rates apply to qualified dividend income received in tax years beginning after December 31, 2002 and ending before January 1, 2009. Therefore, qualified dividend income received since January 1 of this year will be taxed at these reduced rates. Generally, dividends from domestic corporations and certain foreign corporations are considered qualified dividend income.
One exception to the new rate for dividends concerns the calculation of investment interest expense. Taxpayers who wish to treat qualified dividend income as investment income for purposes of calculating deductible investment interest will be required to have their qualified dividend income taxed as ordinary income (i.e., they will not get the benefit of the reduced rates).
Reduction in Tax Rates on Long-Term Capital Gains. The Act reduces the maximum rate of tax on long-term capital gains of individuals from 20% to 15%. In addition, for taxpayers in the 10% or 15% ordinary income tax bracket, the rate on long-term capital gains is reduced to 5% until 2007 and will be zero for 2008. These reduced tax rates apply to sales and exchanges (and payments received) on or after May 6, 2003, and before January 1, 2009.
Investors should note that, even though long-term capital gains and dividends are now taxed at the same rates, capital gain income has two advantages over dividend income. First, the return of basis with respect to the sale of a capital asset is not subject to tax. Second, capital gains can be used to offset capital losses, dividend income cannot be so used.
Increase in Small Business Expensing. Prior to the Act, business taxpayers who placed less than $200,000 of “qualified property” into service for the taxable year could expense, rather than depreciate, up to $25,000 of that property. Qualified property is depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. The Act increases both the threshold and the amount that may be expensed. For tax years 2003 through 2005 business taxpayers who place less than $400,000 of qualified property into service for the taxable year may now expense up to $100,000 of that property. These amounts will be indexed for inflation.
If you have questions regarding the above, please contact Jeremy Welch, the author of this article, or any of the attorneys in the Business Transactions Practice Group of Ruder Ware.
This document provides information of a general nature regarding legislative or other legal developments, and is based on the state of the law at the time of the original publication of this article. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed. You should not act upon the information in this document without discussing your specific situation with legal counsel.
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