AGECON-03 84

                                                                                                                                                           

 

JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003

 

Keith D. Kightlinger, Extension Economist – Farm Management


Cooperative Extension Service, The University of Georgia

Department of Agricultural and Applied Economics

 College of Agricultural and Environmental Sciences


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INTRODUCTION

The Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law by President Bush on May 28.  The Act increases the child tax credit, and makes the credit refundable to taxpayers.  The Act also reduces both ordinary income and capital gains tax rates, increases the standard deduction, and deductions relating to expensing and depreciating qualified assets purchased for use in a trade or business.

 

While the 2003 Act is being cited as the third largest income tax reduction legislation enacted, its provisions are all short-term, being subject to sunset dates.  No provision in the 2003 Act is effective beyond the end of 2008, and many provisions affect 2003 and 2004 only.

 

 

INDIVIDUAL TAXPAYERS

Child Tax Credit

The Act increases the Child Tax Credit from $600 to $1,000 for 2003 and 2004.  The credit becomes refundable, and taxpayers having qualifying children on their 2002 tax return will receive an advance payment of the increase in the credit this summer.  The advance payment will reduce the credit available on the 2003 tax return.  Children who have not reached age 17 as of December 31, 2003 qualify for the credit.  Children born on January 1 of 1987 are considered to be 17 years of age on December 31, 2003, and so, do not qualify for the credit in 2003.

 

Under the Act, the Child Tax Credit drops to $700 per qualifying child for 2005 through 2008.

 

Standard Deduction

The standard deduction for married couples filing jointly jumps to twice the standard deduction amount for single taxpayers in 2003 and 2004.  In 2005, the standard deduction for married filing jointly reverts to 174% of the standard deduction for filing single, as enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001.  Standard deduction amounts for 2003 are $4,750 for single and married filing separate taxpayers, $7,000 for head of household, and $9,500 for married taxpayers filing jointly, and for qualifying widows / widowers.

 

Tax Brackets

The 2003 Act expands the 10% tax bracket for 2003 and 2004.  The 10% tax bracket is increased from $6,000 to $7,000 for single and married filing separate taxpayers. The 10% bracket for taxpayers using the married filing joint status expands from $12,000 to $14,000.  The 10% tax brackets will shrink to their previous ceilings in 2005.  There is no increase in the 10% tax bracket for head of household status filers.

 

The 15% tax bracket for married individuals filing jointly increases to double the amount of the 15% tax bracket for single individuals, eliminating part of the “marriage penalty,” for 2003 and 2004.  In 2005 the bracket will decline to 180% of the amount for single individuals, as enacted in the 2001 Act.

 

Individual Tax Rates

The four higher individual tax rates have been reduced in the 2003 Act, but the tax bracket amounts have not been changed.  The reduction of these tax rates has been accelerated from the provisions of the 2001 Act so that the rates for 2003 – 2010 will be as follows:

 

Percent

“Old” Rates

28

31

36

39.6

New Rates

25

28

33

35.0

 

Capital Gains Taxes

The 2003 Act reduces long-term capital gains tax rates for sales, exchanges and installment payments received after May 5 2003.  The new tax rates are 5% and 10%, replacing the prior 10% and 20% tax rates.  In 2008, taxpayers whose taxable income does not exceed the ceiling of the 15% tax bracket will have long-term capital gains taxed at a zero rate.

 

The 2003 Act eliminates the special long-term capital gains tax rates for assets acquired on or after January 1, 2001, and held for at least five years after acquisition.

 

Qualified dividends will be taxed as capital gains under the 2003 Act.  Dividends paid by foreign companies are generally excluded from the capital gains tax rates, as are dividends treated as investment income for the purpose of deducting investment expenses.

 

Alternative Minimum Tax

The 2003 Act increases the Alternative Minimum Tax (AMT) exemption for individual taxpayers for 2003 and 2004 only.  AMT exemption amounts change as shown:

Filing Status

2002

2003, 4

2005

Single, HoH

$35,750

$40,250

$33,750

MFJ

$49,000

$58,000

$45,000

MFS

$24,500

$29,000

$22,500

Effects on Individual Taxpayers

The advance refund of the expanded child care credit creates a cash windfall for more than 25 million taxpayers this summer.   Since this credit increase comes in advance of tax return filing, it will have to be netted out on the 2003 tax return.  Some taxpayers will repay all or part of the advance.

 

The increase in the standard deduction, and the expansion of the 15 percent tax bracket for married individuals provides significant, but short-term (at this point) relief from the “marriage penalty.”  These changes, along with the expansion of the 10% tax bracket for single individuals, and the reduction of the four highest individual income tax rates, will be reflected in an increase during the second half of 2003 in the take-home pay of wage earners.  New income tax withholding tables and formulas are being developed by IRS to reflect these changes, and will be available to employers before July 1.   Because these changes affect all of 2003, withholding changes include adjustments for the first half of 2003 as well.  As a result, some wage earners may see withholding increase in 2004, when the new rates are in effect from the beginning of the year.

 

The increase in the Alternative Minimum Tax exemption will, at least temporarily, slow the growth in the number of taxpayers finding themselves subject to AMT.  There is interest in both Congress and the Administration in further reducing, or even eliminating AMT for individuals, but doing this in a revenue-neutral manner remains a formidable problem.

 

The reduced capital gains tax rates and the taxation of dividends as capital gains are both allowed for both ordinary and alternative minimum tax computation.


BUSINESS TAXPAYERS

I.R.C. Sec. 179 Expensing

The 2003 Act increases the maximum amount of qualifying property which can be expensed under Section 179 from $25,000 to $100,000.  The dollar value of qualifying property which can be purchased in a single tax year without incurring a dollar-for-dollar in the expense election is also increased, from $200,000 to $400,000.  These changes apply to 2003, 2004 and 2005, with the amounts being adjusted for inflation in 2004 and 2005.

 

As a part of this change in Section 179, off-the-shelf computer software purchased after December 31, 2002 changes from property amortizable under I.R.C. Sec. 197 to property eligible for expensing under I.R.C. Sec. 179.

 

The 2003 Act also permits the making or revoking of a Section 179 election on an amended return for the 2003, 2004, and 2005 tax years.

 

Additional First-Year (AFY) Depreciation

The 2003 Act increases the additional first-year (“bonus”) depreciation provided for in the Job Creation and Workers Assistance Act of 2002 from 30% to 50%, with 30% remaining as an option.

 

Depreciable property will qualify for the 50% AFY depreciation if it is purchased and placed in service after May 5, 2003, and  before Januray 1, 2006.  If a taxpayer elects to not claim the 50% AFY depreciation for an asset, then the 30% AFY depreciation may not be claimed, either.  Property acquired before May 6, 2003 does remain eligible for 30% AFY depreciation, however.

 

Qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS), and have an applicable recovery period of 20 years or less. Only the original user of the property may claim the AFY depreciation.

 

Effects on Businesses

The changes in Section 179 expensing and Additional First-Year Depreciation apply to both individual and corporate business taxpayers.   The following example illustrates the changes in up-front tax benefits created by legislation since 2001.

 

Grady Thomas purchases a new cotton picker for $210,000 on August 15.  His taxable farm income is high enough for him to take advantage of all the depreciation and Section 179 expense deductions available to him.  The table below shows the initial year deductions available to Grady if he purchased the cotton picker in 2001, 2002, or 2003.

 

2001

2002

2003

Initial Basis

$210,000

$210,000

$210,000

Sec. 179

$14,000

$15,000

$100,000

AFY Deprec.

 

$0

 

$58,500

 

$55,000

Regular Deprec.

 

$20,992

 

$14,619

 

$5,890

Total

$34,992

$88,119

$170,890

Balance

$175,008

$121,881

$39,110

 

The above example shows that the increase in the Section 179 expense deduction and in additional first-year depreciation have dramatically increased the first year cost recovery of qualified assets.  This increased deduction leads to a lower net business income in the year the asset is placed in service, and to lower income tax liability for that year.  For self-employed business operators, self-employment tax savings will also be realized.

 

It is important to remember that these deductions lead to a postponement of taxes, and not necessarily to an elimination of them.  The following table shows the effects on regular depreciation over the depreciable life of the cotton picker under the various options available to Grady if he purchases the cotton picker after May 5, 2003.  The selections of Sec. 179 amounts for this example are arbitrary, up to the $100,000 limit.


Cotton Picker Basis Remaining

Available for MACRS Depreciation





Basis

$210,000

$210,000

$210,000

Sec. 179

$100,000

$50,000

$0

AFY

$55,000

$33,000

$0

Balance

$55,000

$127,000

$210,000

Year 1

$5,891

$13,602

$22,491

Year 2

$10,522

$24,295

$40,173

Year 3

$8,267

$19,088

$31,563

Year 4

$6,738

$15,558

$25,725

Year 5

$6,738

$15,558

$25,725

Year 6

$6,738

$15,558

$25,725

Year 7

$6,738

$15,558

$25,725

Year 8

$3,372

$7,785

$12,873

 

The above information clearly shows that deductions for MACRS depreciation in future tax years are significantly limited if extensive use is made of the Section 179 and Additional First-Year Depreciation options.

 

Business taxpayers should remember that the Section 179 expense may be any eligible amount, up to the $100,000 maximum, subject only to the limitation of business income.  The Section 179 deduction cannot be used to create a business loss.

 

The additional first-year depreciation rules are more limiting than the rules for Section179.  For qualifying assets purchased and placed in service after May 3, 2003, the taxpayer may claim 50% AFY, 30% AFY or zero AFY only.  However, there is no business income limitation on AFY.

 

Business taxpayers and the income tax professionals they work with should look closely at both the short and long-term anticipated tax impacts of this new legislation.  This will be especially important for self-employed taxpayers, since self-employment taxes may be a significant portion of the taxpayer’s total liability.


Keith D. Kightlinger, Extension Economist – Farm Management is the Georgia Extension Service subject matter specialist for taxation.  He develops and provides education and information programming to Extension clientele groups.  He also develops and conducts continuing education opportunities for professional income tax practitioners.  He is a member of the National Extension Farm Income Tax Committee, which works with the Internal Revenue Service in developing content for IRS Publication 225, the Farmer’s Tax Guide.

Kkight@uga.edu (229) 386-3512

 

The University of Georgia and Ft. Valley State University, the U.S. Department of Agriculture and counties of the state cooperating.  The Cooperative Extension Service offers educational programs, assistance and materials to all people without regard to race, color, national origin, age, sex or disability.

 

An equal opportunity / affirmative action organization committed to a diverse work force.

 

AGECON-03 84 June 2003

 

Issued in furtherance of Cooperative Extension, Acts of May 8 and June 30, 1914,

The University of Georgia College of Agricultural and Environmental Sciences,

 and the U.S. Department of Agriculture cooperating.

 

Bobby L. Tyson, Associate Dean for Extension

 

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