Tax Alert: Big changes for 1040 returns!
New tax laws to be fully automated in Tax Preparer!
... and accurate tax planning through 2011. See enclosed newsletter for
- Child Tax Credit increase plus reconciliation with advance
- Tax rate reductions for top four tax brackets
- 10% tax bracket expansion
- Marriage penalty relief in standard deduction and bottom two tax
- Capital gains rate slashes for most sales after May 5, 2003 (to 5% for
bottom two tax brackets and 15% for all others)
- Dividend tax reduction to new capital gains rates for most dividends
received in 2003
- AMT exemptions increase -- by $13,000 for married taxpayers
- Sec. 179 expensing limit increase to $100,000, with phaseout only if
cost of all expensed property exceeds $400,000
- Special first-year 30% depreciation allowance increase to 50%
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» 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:
- Child tax credit increase and advance
payment. The maximum credit is raised from $600 to $1,000 per child
(previously slated for tax year 2010), and cash advances on this break will be
mailed to taxpayers in late July and early August.
- Tax rate reductions
accelerated. Rates for the top four brackets are lowered to the level
not previously scheduled to occur until tax year 2006. The new rates are 25%,
28%, 33%, and 35%, down from 27%, 30%, 35%, and 38.6%. In addition, the end of
the 10% bracket is raised from $6,000 to $7,000 for single filers (doubled for
joint filers), which was not slated to occur until tax year 2008.
- Marriage penalty relief
accelerated. The standard deduction for joint filers is raised to
double that for singles, which was not previously slated to occur until tax year
2009. Similarly, the end of the 10% and 15% tax brackets are raised to double
those for singles, which was not slated to occur until tax year 2008. (Amounts
for those married taxpayers filing separately are still half those for joint
filers, making all levels the same as those for singles.)
- Capital gains rates
lowered. The former 20% and 10% maximum rates are lowered to 15% and
5% for property sold after May 5, 2003. And for 2008 the 5% rate drops to 0%!
(The 5% and 0% rates apply to those in the regular 10% and 15% tax
- Dividends qualify for capital gains
rates. Most dividends received January 1, 2003 or later are taxed at
the new 15% and 5% rates that apply to capital sales made after May 5,
- AMT exemption raised. The
exemption is raised to $58,000 for joint filers and $40,250 for single filers, up
from $45,000 and $33,750, respectively.
- Sec. 179 expensing raised.
The first-year expensing allowance (sometimes called sec. 179 depreciation) is
raised from $24,000 to a whopping $100,000, and the total cost of the property
can be as high as $400,000 (up from $200,000) before limitations
- Special allowance raised.
The former special 30% allowance for first-year depreciation is raised to 50% for
property acquired after May 5, 2003. If you claim this special allowance on a
car, the maximum first-year depreciation on the car is raised to
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
Lower estimated tax payments?
Although the IRS has not modified their Form 1040-ES for 2003
to reflect this fact, many taxpayers are allowed lower estimated tax payments
for the remainder of the year. Your only requirement is that you pay enough
estimated tax to avoid penalty on Form 2210 next year. We therefore recommend
that you refigure your tax liability for 2003 based on the information in
this newsletter to see if you can lower your subsequent payments. The
difference should be significant for most taxpayers.
... but most are short-lived
These 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
- Child tax credit falls to
$700 per child for tax year 2005, rises to $800 for 2009 and $1,000
for 2010, but falls to $500 for 2011.
- 10% tax bracket narrows in
2005. The top end of the bracket falls back to $6,000 ($12,000 for
joint filers) for 2005 then jumps back up to $7,000 ($14,000 for joint filers)
for 2008. The bracket is eliminated for tax year 2011 so that the 15% tax rate
- Tax rates are unchanged through
2010 then revert back to 2001 rates in 2011, with just five brackets
instead of six: 15%, 28%, 31%, 36%, and 39.6%.
- Marriage penalty relief
reduced. In tax year 2005 the marriage penalty relief returns to the
previous slow phase-in. The standard deduction for joint filers falls from double
(2.0) the deduction for singles to a factor of 1.74, and the end of the 15%
bracket falls from double to 1.8. These factors gradually approach 2.0 in the
following three or four years, but revert back to the pre-2003 rules in
- Capital gains rates reverts back in
2009. This break has the most longevity of all. The new 15% and 5%
rates revert back to 20% and 10% for 2009 and later, and do NOT expire in
- Dividends revert back in
2009. The capital gains rates will no longer apply for tax year 2009
- AMT exemption reverts back in
2005. The former exemption amounts apply for tax year 2005 and all
- Sec. 179 expensing reverts back in
2006. The first-year expensing allowance reverts to the previously
scheduled maximum of $25,000 for tax year 2006 and all years thereafter. The
total cost of property before limitations apply falls back to $200,000 at the
- Special allowance gone in
2005. Both the 30% and 50% bonus depreciation expire for most
property at the end of 2004 (2005 for certain property with recovery periods of
at least 10 years).
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:
- you elect to use the 30% bonus depreciation
instead of the new 50% bonus depreciation, or
- you elect to use NO bonus depreciation
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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