The Accountant�s Full Employment Act of 2003 (also referred to as the Jobs and Growth Tax Relief Reconciliation Act of 2003) has been signed. But before you groan, there is quite a bit of good news for our clients, including reductions across the board in marginal income tax rates, dividend income tax rates capped at 15%, capital gains tax rates capped at 15%, increased child tax credit amounts, increased alternative minimum exemption amounts and more. This article focuses on the tax planning opportunities that have come about as a result of these changes.
Tax Rate Reduction
Tax brackets have been lowered by 2% across the board. Except for the lowest two tax brackets (10% and 15%) all of the higher tax brackets have been reduced by 2%. The highest tax bracket (which used to be 38.6%) has been reduced to 35%. Unless you are making estimated tax payments, you really don�t have to do anything to take advantage of these reductions. Beginning in July, your employer is requested to begin using updated payroll withholding tables that will effectively reduce your total federal tax withholding for the year to reflect the lower marginal tax rates. So, by the end of December, you should have received the full benefit of the 2% reduction in tax rates. Your state income tax withholding has not been affected by these tax law changes, so your state withholding should not change in July.
Tax planning opportunity �You may be able to reduce your federal estimated tax payments. We can recalculate your estimated tax payments and set you up with new coupons. Call us and we�ll explain how this service will help you.
Marriage Penalty Relief This legislation is the first sign of REAL marriage penalty relief. It consists of two provisions:
- The standard deduction for married taxpayers is now double the amount for single taxpayers. If you are not itemizing deductions, you will now receive the same standard deduction as two single persons. This, in combination with the next change, goes a long way toward providing relief to married taxpayers.
- The 15% marginal tax bracket is doubled for married taxpayers. This means that more of a married couple�s income is taxed in the 15% marginal income tax bracket. An extra $9,200 (using last year�s tax brackets) for married taxpayers will be taxed at 15% instead of 25%. That�s a tax savings of $920.
Tax planning opportunity �Married couples should look at reducing their withholdings or estimated tax payments. Even though the payroll tax tables will change in July, the effects of the changes will not completely account for the tax savings for married filers. Bring us your end-of-month pay statements from June and August and we�ll recommend adjustments to your withholding or estimated payments so that you see the advantage of your tax reduction now, rather than in a refund check next April.
Expanded Write-Offs for Business-Related Expenditures
If you are a business owner, there are now two huge incentives to purchase business-related equipment in 2003. The first, and probably most valuable, is the increase in the amount of business equipment purchases you can write off in the year you purchase them. That limit used to be $24,000, but is now $100,000. The second incentive applies primarily (although not exclusively) to businesses that have gross revenue over $400,000. These businesses cannot use the $100,000 first year write-off. However, they will benefit from the 50% first year depreciation write-off, up from 30%.
Tax Planning Opportunity �We have two thoughts. Estimated tax payments could be affected. We can help revise and reduce the estimated payments for you based on your projected expenditures for equipment. Secondly, if you have a high percentage business use of a vehicle, there is a large incentive to purchase larger (and heavier�more than 6,000 pounds) vehicles and take advantage of this expanded first year write-off.
Alternative Minimum Tax Relief
The exemption available for income that is subject to the alternative minimum tax has increased to $58,000 for married taxpayers and $40,250 for single taxpayers.
Tax Planning Opportunity �Persons with incentive stock options (above water) can now exercise and hold a larger number of shares without incurring the dreaded alternative minimum tax. This takes careful planning, so contact BWFA to speak to an advisor. Secondly, persons with income above $125,000 who have been �slipping� into the alternative minimum tax zone may avoid that tax and be able to reduce withholding or estimated tax payments. We can run the estimates for you.
We hope we�ve given you a few tax planning ideas that have come about as a result of this new tax legislation. Call us, e-mail us, or come in for an appointment and we�ll talk about implementing the strategies that will benefit you.