I'm sure you've heard about the passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003-and the political controversy it stirred up. Naturally, you're probably wondering how you'll be affected by this new law. Today's column highlights how the new law will cut your tax bill for 2003, the changes in store in the future, and how this may affect your tax and financial planning.
Your income will be taxed at lower rates.
For regular tax purposes, the first slice of your income is taxed at 10%, and additional slices of income are taxed at progressively higher rates until you reach the maximum rate. These various slices of income, and the tax rates each is subject to, are also known as the tax brackets. All of the following tax rate cuts apply retroactively to Jan. 1, 2003:
If you file as a single person or are a married person filing separately from your spouse, the first $7,000 (instead of $6,000) of your taxable income will be taxed at 10%, the lowest tax rate. Because the extra $1,000 was taxed at 15% under the prior law, you save a maximum of $50 here.
* If you file a joint return, the first $14,000 (instead of $12,000) of your taxable income will be taxed at 10%, the lowest tax rate. Because the extra $2,000 was taxed at 15% under the prior law, you save a maximum of $100.
* If you file a joint return, more of your taxable income will be taxed at 15%, instead of winding up in the next highest tax bracket and being taxed at 25%.
* The new law reduces all of the tax rates above 15% for all individuals (as well as estate and trusts). The new tax rates above 15% are 25% (instead of 27%); 28% (instead of 30%); 33% (instead of 35%); and 35%, the top rate (instead of 38.6%).
How much will these tax rate changes save you?
The answer depends on your filing status and how much taxable income you have. For example:
* If you are single with $60,000 of taxable income for 2003, your tax bill will be $682 less. If your taxable income is $120,000, you save $1,882.
* If you are married, file a joint return, and have $60,000 of taxable income for 2003, your tax bill will be $1,286 less. If your taxable income is $120,000, you will save $2,486.
Wage earners will get a larger paycheck as a result of these (and other) changes. You'll see this as soon as your employer's payroll processor puts the new withholding tables into effect.
Bigger standard deduction for joint filers.
If you are married, file a joint return, and don't itemize your deductions, your basic standard deduction for 2003 is $9,500, a $1,550 increase.
Bigger alternative minimum tax (AMT) exemptions.
The new law makes the AMT less of a problem by increasing the maximum AMT exemption amount to $58,000 for marrieds filing jointly (a $9,000 increase), to $40,250 for unmarried individuals (a $4,500 increase), and to $29,000 for married individuals filing separate returns (a $4,500 increase).
Boosted child tax credit, partially refundable for 2003.
The child tax credit for 2003 is $1,000 per qualifying child, a $400 increase. If you qualify, you may have already received this increased amount in advance of the 2003 tax-filing season via a Treasury check. The amount of the payment will be based on your 2002 filing status and income, as well as the number of children claimed on the 2002 tax return who will still be under age 17 in 2003.
The new law doesn't change the income levels at which the child credit starts to phase out ($75,000 for singles, $110,000 for married couples and $55,000 for marrieds filing separately).
Reduced taxes on capital gains and dividends.
For sales and exchanges (and installment payments received) after May 5, 2003, gains on most capital assets held longer than one year will be taxed a maximum rate of 15% (instead of 20%). The maximum tax rate on capital gains drops to 5% (instead of 10%) if it would otherwise be taxed at 10% or 15% (i.e., if it were ordinary income such as salary).
In addition, dividends you receive in 2003 from a domestic corporation (or certain qualified foreign corporations) are taxed at the same rates that apply to capital gains. In other words, the dividends are taxed at rates of 15% or 5%. These new capital gain and dividend rates apply for both the regular tax and the AMT.
What the future holds in store
Unfortunately, to meet budget constraints, many of the tax breaks in the new law are not permanent. For example, unless Congress changes the rules again, many of these reforms will be watered down after 2004, such as the new marriage penalty relief, the AMT exemption amounts, and the maximum child tax credit. What's more, the reduced tax rates for capital gains and dividends will only last through the end of 2008. This will make it much harder for all of us to plan for the long haul.
Your first step should be to examine the new law's immediate effect on you, your family, and your investments, and then come up with a game plan for the future.
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Alan S. Friedlander owns a financial services practice based in Gurnee, IL. He specializes in investment management, and mortgage financing. Friedlander can be reached at 847/296-9595 or alfriedlander@yahoo.com. Please feel free to call him if you'd like to discuss your financial game plan.