New tax bill passed
‘Half a sausage is better than none’
By Jim Brandenburg, for SBT
Forgive me for mixing metaphors. You may have heard the expression, "making a new law is a lot like making sausage. You may not like what goes into the process, but the end-product is pretty good." There was much involved in the political process of passing the "Jobs and Growth Relief Reconciliation Act of 2003," but the end result is tax relief for individuals and businesses.
President Bush had originally proposed a tax-cut package of more than $700 billion, but the final package passed at $350 billion. It is still a significant tax cut — the third largest in history.
The Republican leadership in Congress had to walk a fine line within its own party to pass this tax-cut bill. With narrow majorities in each chamber, and with little Democratic support, the leaders had to craft a tax bill to gain enough support within their own parties, while also navigating through legislative obstacles.
The goal was to provide tax incentives to stimulate the struggling economy.
Although the president did not receive all that he wanted, he is pleased with the "half a loaf" he did receive.
Let’s look at the highlights of this bill.
Tax rate cut – Congress reduced the individual tax rates in 2001. Some of which were effective in 2001; others were delayed until 2006. The 2003 tax bill accelerates the rate cuts across the board to 2003. Here are the top new tax rates:
Tax year 2002 27.0%30.0%35.0%38.6%
Tax year 2003 and after 25.0%28.0%33.0%35.0%
Marriage penalty tax relief – Relief from the "marriage penalty tax" was also scheduled to take effect gradually through 2010, but this relief has been accelerated to 2003.
Child tax credit – Finally, the increase from $600 to $1000 in the tax credit for dependent children under age 17 has been accelerated to the 2003 tax year. Congress felt the need to provide immediate tax relief for 2003 and will send rebate checks this summer to those families affected by the increase in child tax credit.
"Bonus" depreciation – In 2002, Congress passed a measure providing tax relief for new fixed-asset purchases by allowing businesses to write off 30% of the cost in the first year. The new bill increases the percentage from 30 to 50 for any new assets placed into service on or after May 6, 2003.
First-year expensing – Previously, small businesses could write off up to $25,000 of fixed assets in the year of acquisition, provided their total fixed asset additions did not exceed $200,000 in a year. This $25,000 figure is increased to $100,000 for 2003 along with an increase in the annual limitation on additions to $400,000. This expensing measure now includes "off-the-shelf" computer software.
Dividend income – The tax treatment of dividends was a central theme of the president’s initial tax proposal, and it labored through the legislative process. What eventually passed is not a total elimination of the tax on dividends, but a reduction in the rate of tax to about half of the current rate. The new law will now treat dividends as capital gains taxed at 15%, rather than as ordinary income taxed at rates up to 35%. Those in the bottom 10% and 15% tax brackets will have their dividends taxed at a new 5% rate.
Capital gains – The tax rate on long-term capital gains had been 20%, but under the new tax law the rate will drop to 15% like the new tax rate on dividends (5% for those in the bottom brackets). This is effective for sales occurring on or after May 6, 2003.
This tax package was a long involved process and was by no means a certainty. Congressional leaders plan to introduce and push more tax bills later this year. Look for bills on the tax treatment of exports, charitable giving measures and retirement plans. It is still uncertain what may pass.
Jim Brandenburg is a tax shareholder of Kolb+Co., a CPA and business advisory firm in West Allis; www.KolbCo.com.
June 13, 2003 Small Business Times, Milwaukee