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2003 Tax
Law Changes
Below
is a summary of selected Federal tax law changes applicable
to Tax Year 2003:
Child
Tax Credit
Capital
Gain Tax Rates
Dividends
Section
179 Expensing
Bonus
Depreciation
Marriage
Penalty Relief
Alternative
Minimum Tax (AMT)
Dependent
Care Credit (Form 2441)
Lifetime
Learning Credit (Form 8863)
Qualified Adoption Expenses (Form
8839)
Household
Employees
Coverdell
ESAs
Deemed
IRA
Child
Tax Credit
For tax-years 2003 and 2004, the maximum
credit will be increased from $600 to $1,000. For qualifying
taxpayers, an advance payment of the portion of increased Child
Tax Credit for 2003, up to $400, will be issued to the taxpayer
between July 1, 2003 and October 1, 2003. Taxpayers who
received the advance payment will have to adjust the amount of
Child Tax Credit they claim on their 2003 tax return.
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Capital
Gain Tax Rates
Capital
Gain rates for sales and exchanges on or after May 6, 2003
and on or before December 31, 2007 will decrease by 5 percent
to 5 percent (from 10 percent) and 15 percent (from 20 percent). Long-term
capital gain rates for collectibles will remain at 28 percent. Unrecaptured
Code Sec. 1250 gains will continue to be taxed at a maximum
rate of 25 percent. The five-year property rates (8 percent
and 18 percent) have been repealed until 2009.
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Dividends
For most individuals, qualified dividend
income will be taxed at a maximum rate of 15 percent. A
new 5 percent rate will apply to lower income taxpayers. The
15 percent rate is effective on distributions after December
31, 2002 and on or before December 31, 2008. The 5 percent
rate is effective on distributions after December 31, 2002 and
on or before December 31, 2007 and drops to 0 percent for 2008.
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Section
179 Expensing
The Section 179 expensing limitation for
purchasing certain qualified equipment has increased to $100,000
(from $25,000) and the phase-out threshold increased to $400,000
(from $200,000). The change will be in effect for tax-years
2003 through 2005. For tax-years 2004 and 2005, the expensing
limitation will be indexed for inflation. The definition
of qualified equipment has been changed to include off-the-shelf
computer software.
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Bonus
Depreciation
For property acquired after May 5, 2003,
bonus depreciation increases to 50 percent for original use property. For
property acquired before May 6, 2003 or if there is a binding
written depreciation rate remains at 30 percent.
Luxury
automobile depreciation dollar limits have also been increased
to $7,650 (from $4,600) to reflect the change in bonus depreciation.
Qualifying
bonus depreciation property must be acquired and placed in
service before January 1, 2005.
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Marriage
Penalty Relief
For
tax-years 2003 and 2004, the standard deduction for married
couples is twice the amount of single taxpayers. For
tax-year 2003, the standard deduction will be $9,500 for married
couples.
For
tax-years 2003 and 2004, the 15 percent tax bracket has been
expanded for joint filers to be twice the width of the same
bracket for single filers.
For
tax-years 2003 and 2004, married filing separately taxpayers
will use the standard deduction for single taxpayers.
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Alternative
Minimum Tax (AMT)
The AMT exemption amount for single taxpayers
increases to $40,250 (from $35,750). The exemption for
married taxpayers increases to $58,000 (from $49,000). This
provision expires in 2005.
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Dependent
Care Credit (Form 2441)
The maximum amount of eligible expenses
for the child and dependent care credit will be $3,000 (from
$2,400) for one qualifying individual and $6,000 (from $4,800)
for two or more qualifying individuals.
The
maximum credit percentage will be 35 percent (from 30 percent). The
maximum credit will be $1,050 (from $720) for one qualifying
individual and $2,100 (from $1,440) for two or more qualifying
individuals. The rate will be reduced if adjusted gross
income is more than $15,000 (from $10,000).
The
earned income of a spouse who is either a full-time student
or incapable of self-care is deemed to be $250 (from $200)
for a taxpayer with one qualifying individual and $500 (from
$400) for a taxpayer with two or more qualifying individuals.
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Lifetime
Learning Credit (Form 8863)
The amount of qualified tuition and related
expenses you may take into account in calculating the Lifetime
Learning Credit increases to $10,000 (from $5,000). The
credit will equal 20 percent of these qualified expenses, with
the maximum credit being $2,000.
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Qualified
Adoption Expenses (Form 8839)
The
credit increases to $10,160 (from $10,000) for qualifying adoption
expenses. The $10,160 for a special needs child is available
regardless of the amount of qualifying expenses. The
credit for a special needs child will be allowed for the year
in which the adoption becomes final. No credit for a
special needs child is allowed until the adoption becomes final. The
phase out range will remain at $150,000 to $190,000 of modified
adjusted gross income.
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Household
Employees (Schedule H)
The
Social Security and Medicare wage threshold for household employees
will increase to $1,400 (from $1,300). If you pay a household
employee cash wages of less than $1,400, you do not have to
report and pay Social Security and Medicare taxes on that employee’s
wages.
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Coverdell
ESAs
A distribution from Coverdell ESA will be
reported on Form 1099-Q instead of Form 1099-R.
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Deemed
IRA
A qualified plan can maintain a separate
account under the plan to receive voluntary employee contributions. If
the separate account otherwise meets the requirements of a traditional
IRA or Roth IRA, it is deemed a traditional IRA or Roth IRA. A
deemed IRA is subject to IRA rules and not to qualified plan
rules. Additionally, the deemed IRA and contributions to
it are not taken into account in applying qualified plan rules
to any other contributions under the plan. Voluntary employee
contributions must be designated as such by employees covered
under the plan. They are includible in income.
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