HowardNews
» Special Edition -- The New Tax Law «
To help you assess the impact of the recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003, we briefly review the new tax laws in this newsletter. As you will see, the laws will lead to much more complicated forms and calculations, which are sure to cause problems for most taxpayers and the IRS. Nevertheless, they will all be built into your Tax Preparer software for next tax season with the same unique level of automation that you have come to expect from HowardSoft. You'll hardly notice the difference in the way you prepare returns with Tax Preparer because it will all be integrated seamlessly into the software. (If you haven't yet ordered your update for next year, check out the Order Form in this newsletter. You'll see that we've added a great deal, especially at the Premium Level. For more detail, see our Spring 2003 HowardNews, which you can view on our web site at www.howardsoft.com.) Many breaks now...The new law includes a number of breaks for both individuals and businesses, but their implementation is complex and will surely lead to inaccurate returns for those who prepare returns without the help of Tax Preparer. The major changes, some of which are detailed further in this newsletter, include:
Although the tax bill also included numerous revenue provisions of importance to special interests, the preceding list covers the provisions of interest to most taxpayers, and all changes in this list will be handled automatically in Tax Preparer's 2004 Edition.
... but most are short-livedThese are very significant changes for many taxpayers, especially for investors and businesses. But most of the changes are slated to expire in just 2 or 3 years, reverting back to the former law, including
Note that the expiration of the breaks from the prior tax legislation is unchanged by the new legislation, so most breaks vanish totally in 2011. ... and complications rule!As usual, political concerns outweighed simplification in Congress's formulation of the law. In spite of pleas from the IRS, Congress passed a law that makes some calculations inordinately complex and dependent on unclear qualifications. Here are just a few of the difficulties introduced by the new law. Advance payment must be reflected in child tax credit calculations. The law defines an advance payment of the increase in the Child Tax Credit, which the IRS is mailing to taxpayers in late July and early August. However, the advance payment is based on a taxpayer's return for tax year 2002, using income for that year but using only Part I of Form 8812, and eliminating children over 17 by the end of 2003 (based on IRS records of the child's age). Accordingly, the advance payment will often be less than the nominal $400 increase per child, and will often differ from the actual allowed credit for tax year 2003. Rather than merely adding a line on Form 1040 for reporting the advance payment, the IRS has modified the computation of the Child Tax Credit to reflect the advance payment. Furthermore, the amount to be used in the calculation will differ from the check received by the taxpayer if the IRS withholds any amount for past taxes due, or marriage or filing status changes affect the amount attributable to the taxpayer. It will therefore be very important to use the information supplied by the IRS with the check to determine the amount of payment to be used in the calculations. (There's a gift in the law for some: Those who receive more advance payment than the credit would otherwise allow for 2003 do not have to pay back the difference.) Seven different capital gains rates now apply. Because the new rates apply only for sales after May 5, 2003, the number of different rates has increased again! Depending on the type of property sold, the date of the sale, and the taxpayer's tax bracket, the capital gains rate can be 5%, 8%, 10%, 15%, 20%, 25%, or 28%. This means that page 2 of Schedule D and the even longer IRS worksheet for Schedule D will be longer and more complex than ever, making it almost mandatory to use tax software like ours to determine the proper tax. Not all dividends qualify for capital gains rates. Interestingly, dividends that qualify for treatment as capital gains do not have to meet the May 5, 2003 test. That is, dividends paid anytime during the year can qualify. However, you must have held the associated stock for more than 60 days during a 120-day period that begins 60 days before the ex-dividend date. In addition, there are restrictions on dividends from foreign entities, real estate investment trusts, and certain mutual funds. Therefore, some dividends are taxed at the new low capital gains rates and others are taxed at the regular tax rates! Special allowance "elections" are now three-fold. The introduction in 2002 of the 30% bonus depreciation caused a great deal of confusion because of its timing and technical provisions. This confusion is compounded by the introduction of a new 50% bonus depreciation. Under both laws the bonus depreciation must be claimed unless the taxpayer consciously elects out of it. This provision was a huge headache for the IRS in 2002 because the law was passed late in the 2002 tax season after many taxpayers had already filed. While the situation is better this time around because of the timely passage of the new law, there are now two sets of laws -- before May 6, 2003 and after May 5, 2003 -- with two possible elections for the latter. That is, the new 50% bonus depreciation applies only to property acquired after May 6, 2003 and is mandatory unless you make one of two possible elections:
Furthermore, whatever election you make must apply to all property in the same class! (These complications will be especially difficult for IRS auditors because the acquisition date for the property is not a part of the IRS Form 4562 for most qualifying property.)
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