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Tax Alert: Big changes for 1040 returns!

New tax laws to be fully automated in Tax Preparer!
  • Child Tax Credit increase plus reconciliation with advance payments
  • Tax rate reductions for top four tax brackets
  • 10% tax bracket expansion
  • Marriage penalty relief in standard deduction and bottom two tax brackets
  • 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%
... and accurate tax planning through 2011. See enclosed newsletter for details.

PLUS: e-file specials inside (expire August 15, 2003)

by HowardSoft®
Professional software at personal prices.
Summer 2003

» 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

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 brackets.)
  • 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, 2003.
  • 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 apply.
  • 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 $10,710.

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.

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 law, including

  • 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 applies.
  • 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 2011.
  • 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 2011.
  • Dividends revert back in 2009. The capital gains rates will no longer apply for tax year 2009 and thereafter.
  • AMT exemption reverts back in 2005. The former exemption amounts apply for tax year 2005 and all years thereafter.
  • 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 same time.
  • 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 at all.

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.)

Maximize your e-file profit with low-cost upgrades ... until August 15th

If you plan to e-file more than 25 returns next year and have not yet ordered an e-file special, check out our current Order Form. You can reduce the per-return transmission fee by upgrading from e-file Silver (built into Standard and Premium updates) to e-file Gold or Platinum, as detailed on the enclosed Order Form. Order by phone, fax, mail, or on the internet at