The Jobs and Growth Tax Relief Reconciliation Act of 2003

As you may know, Congress has just passed some very taxpayer-friendly legislation, The Jobs and Growth Tax Relief Reconciliation Act of 2003. Highlights of the legislation:

Reduction in marginal tax rates for individuals – Effective retroactive to January 1, 2003, the highest marginal rate bracket has been reduced from 38.6% to 35%.  Similarly, the 35% rate has been reduced to 33%, the 30% rate to 28%, and the 27% rate to 25%.  Also, the 10% and 15% rate brackets have been expanded to cover more income.

Reduction in maximum rate on long-term capital gains to 15% – Effective for sales and exchanges (and installment payments received) after May 5, 2003, the top Federal rate on long-term capital gains has been reduced from 20% to 15%.

Reduction in tax on dividends – President Bush had proposed to eliminate the taxation of dividends.  Instead, what he got was a reduction in the rate that applies to dividends from the ordinary rates (i.e. up to 38.6% prior to this legislation) to the long-term capital gains rates (maximum of 15% under the new legislation).

Increase in child tax credit – The child tax credit has been increased from $600 per child to $1,000 per child. The increased amount will be sent to taxpayers (who qualify based on their 2002 returns) by the IRS beginning in July as an advance (similar to the $600 “rebate” checks in 2001).  As under prior law, the credit is phased out for taxpayers with income over a certain threshold ($75,000 for singles, $110,000 for married filing jointly, and $55,000 for married filing separately).

Increase in Section 179 expensing election amount – The amount of fixed asset purchases that a business can elect to immediately expense for income tax purposes (rather than capitalizing and depreciating over a number of years) is increased from $25,000 to $100,000 for 2003.  This benefit is phased out for companies that place more than $400,000 of tangible personal property in service during the tax year.  Also, the amount expensed cannot exceed the business’ taxable income for the year.  Generally, only tangible personal property will qualify for this immediate expensing.  However, under the new rules, off-the-shelf software will qualify as well.

50% bonus depreciation – Generally, fixed assets have to be depreciated over their prescribed tax life, unless they qualify for the section 179 immediate expensing election described above.  Legislation passed in March 2002 (designed to stimulate the economy after the 9/11 terrorist attacks) provided that businesses could take an immediate deduction (referred to as “bonus depreciation”) for 30% of the cost of most NEW depreciable assets (other than buildings) placed in service after September 10, 2001 and before September 11, 2004.  The new legislation increases this bonus depreciation amount to 50% for assets acquired after May 5, 2003 and before 2005.  This bonus depreciation is not subject to the limitations that apply to the section 179 expense election described above.