Tax Topics III

"The hardest thing in the world to comprehend is the income tax." Albert Einstein

"Any one may arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Judge Learned Hand

Note: All provisions of JGTRRA of 2003 will expire after December 31, 2010, similar to provisions under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). (Congress may choose to extend these provisions at a later date.) In general, JGTRRA accelerates previously enacted tax rate reductions retroactively to January 1, 2003, and provides for a maximum 15% rate on dividends and long-term capital gains.

Income Tax Provision Effective January 1, 2003, new tax rates applicable to individuals and married couples will be as follows: 10%, 15%, 25%, 28%, 33%, and 35%, (previous rates were 10%, 15%, 27%, 30%, 35%, and 38.6%).

The standard deduction for married couples is increased to twice the amount of the standard deduction for single taxpayers only in 2003 and 2004 ($9,500). The standard deduction for single taxpayers remains at $4,750.

The taxable income levels for those in the 10% bracket increases from $6,000 to $7,000. For married couples, the income threshold increases from $12,000 to $14,000.

The 15% tax bracket for joint filers is expanded to twice the width of the same bracket for single filers for 2003 and 2004.

Child Tax Benefits The amount of the child tax credit is increased from $600 to $1,000 in 2003 and 2004. In 2003, the increased amount of the child tax credit will be paid in advance beginning in July 2003 on the basis of information on the taxpayer’s 2002 tax return who claimed the credit. Taxpayers will not have to take any action to receive this advance payment as Treasury and the IRS will make the necessary calculations and automatically mail checks to eligible taxpayers. Anyone born after 1987 would qualify for the credit.

Capital Gains and Dividend Relief The maximum tax rates on dividends paid by corporations to individuals and on individual capital gains is reduced to 15% in 2003 through 2008. For taxpayers in the 10% and 15% ordinary income tax brackets, the rate on dividends and capital gains is reduced to 5% in 2003 through 2007 and to zero in 2008. The lower capital gains rates do not apply to corporate taxpayers or to gains from collectibles (taxed at 28%) and certain gains from depreciable real estate (taxed at 25%).

The new rates apply to capital gains realized on or after May 6, 2003, and to dividends received in 2003 and thereafter.

The reduced dividend rate applies to dividends received by individual taxpayers from domestic corporations and from qualified foreign corporations. The term “qualified foreign corporation” includes a foreign corporation whose stock (or American Depository Receipts (ADRs) with respect to such stock) is tradable on an established securities market in the United States. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the Treasury Department determines to be satisfactory for purposes of this provision and which includes an exchange of information program. Until further guidance is issued, a foreign corporation will be treated as eligible if substantially all of its income in the taxable year in which the dividend is paid would qualify for the benefits of a tax treaty with the United States. The test for qualified foreign corporation is an either/or test in which the foreign corporation can qualify for the reduced dividend rate if it meets either: 1) stock (or ADRs) traded in U.S. market; or 2) eligible for a tax treaty.

* Dividends paid to tax deferred accounts will not receive the reduced 15% rate (i.e., a dividend paid to an Individual Retirement Account (IRA), while not taxable on receipt, would not be subject to the reduced 15% tax rate upon ultimate distribution from the IRA to the holder.)

Dividends are not eligible for the reduced rates unless received by the shareholder who has held the stock more than 60 days during the 120-day period beginning 60 days before the ex-dividend date. For preferred stock, the relevant holding period is 90 days during the 180-day period beginning 90 days before the ex-dividend date.

Dividends generated by Regulated Investment Companies (RICs) will be eligible for the reduced tax rates to the extent they are attributable to qualifying dividends received by the RIC. Mutual funds, which are normally taxed as regulated investment companies, are able to distribute their long-term capital gains to shareholders as “capital gain dividends.” Such capital gain dividends will qualify for the lower 15% rate on long-term capital gains to the extent that the distribution is attributable to long-term gains on or after May 6, 2003. Long-term gains on the sale of shares in a regulated investment company on or after May 6, 2003 will also qualify for the lower capital gains rates.

Generally, ordinary dividends received from a Real Estate Investment Trust (REIT) will not enjoy the favorable tax rate on dividends, although long-term capital gain dividend distributions will.

Alternative Minimum Tax The exemption for single taxpayers rises to $40,250 for 2003 and 2004 and reverts to 2002 tax level the following year and thereafter. The exemption for married couples rises to $58,000 in 2003 and 2004 and reverts to 2002 level in 2005.

Small Business Expensing The amount of investment (other than real estate) in depreciable tangible personal property and off-the-shelf software that may be immediately deducted by small businesses is increased from $25,000 to $100,000 beginning in 2003. The amount of investment qualifying for this deduction begins to phase out for small businesses that place more than $400,000 of such property into service during the year. These changes are effective for taxable years beginning in 2003, 2004 and 2005.

Bonus Depreciation Bonus depreciation rises to 50% for tangible personal property, other property depreciable over a period of less than 20 years, and computer software acquired after May 5, 2003, and before January 2, 2005. Property does not qualify for 50% bonus depreciation if a binding, written contract was in effect before May 6, 2003. The enhanced bonus depreciation continues to apply on top of regular depreciation in the first year only. The maximum business vehicle depreciation for new vehicles purchased on or after May 6, 2003 is $10,710.

Income Tax Provisions The income threshold for those in the 10% bracket reverts to $6,000 for single filers and $12,000 for married filers.

The 15% tax bracket falls to 180% of the maximum taxable income in the same bracket for unmarried individuals (adjusted for inflation).

The standard deduction for married taxpayers will fall to 174% of the standard deduction for single taxpayers and gradually rise to double the amount in 2009.

Income Tax Provisions The 15% deduction and the standard deduction for married couples continues to phase up under the 2001 Act already in place.

The income threshold for those in the 10% bracket is raised to $7,000 for single filers and $14,000 for married filers, indexed for inflation in subsequent years.

Capital Gains The 5% rate on capital gains for low-income taxpayers drops to zero for one year only.

Income Tax Provisions All tax rate cuts revert to 15%, 28%, 31%, 36% and 39.6%

[1] This FPA EXECUTIVE SUMMARY is solely for general informational purposes and does not represent legal advice from the FPA or Golden Gate Advisors concerning United States tax law. If legal advice or other expert assistance is required the user should consult a professional. The information contained in this executive summary is offered in good faith and was obtained from federal sources deemed to be reliable; however, the information is offered without warranties, express or implied, as to its merchantability, fitness for a particular purpose, or any other matter.