Broker Check

                                                                                                                                                                                                                                      May 30, 2003


Jobs and Growth Tax Relief and Reconciliation Act of 2003



          The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) passed by Congress and signed into law by President Bush immediately puts money into the pockets of all taxpayers.  This new legislation introduces a $330 billion tax and economic growth package designed to stimulate the U.S. economy through a variety of tax cuts and credits.  Although many provisions are retroactive to January 1, 2003, this new legislation expires or “sunsets” beginning in 2009.  Investors should be wary, however, of provisions that expire sooner.


·        Lower ordinary income tax rates.  Taxpayers will enjoy lower income tax rates in 2003, originally scheduled to be phased-in over the next several years.  The new ordinary income tax rates are 25%, 28%, 33% and 35% vs. the original rates of 27%, 30%, 35% and 38.6%.  Additionally, the 10% rate will now apply to the first $7,000 of taxable income for a single filer, and $14,000 for a joint filer—an increase of $1,000 and $2,000 respectively.


(Individuals will see less federal tax withholding from their paycheck as early as this summer.  Consider contributing this excess cash into your company’s 401(k) plan 403(b) or 457 plan, or even a payroll deduction 529 plan.  If you pay estimated taxes, be sure to recalculate your payments based upon the new rates.)


·        Lower taxes on dividends.  The maximum tax rate on dividends for individuals falls from your ordinary income bracket to the more generous capital gains rate of 15% (or 5% if your capital gains rate is currently 10%).  In 2008, the year before the scheduled sunset, the 5% rate will drop to 0%.  Most, but not all, equity investments will qualify for the lower dividend rate.  (Dividend-paying stocks may become more attractive).

·        Lower taxes on capital gains.  The capital gains rates of 20% and 10% are lowered to 15% and 5% respectively, effective for sales and exchanges on or after May 5, 2003 and before January 1, 2009 for securities held for more than one year.  In 2008, the year before the scheduled sunset, the 5% rate drops to 0%.


(Because distributions from tax-deferred accounts such as 401(k)s and IRAs are taxed as ordinary income, investors who are drawing from their retirement accounts should consider favoring equities in their taxable accounts, and fixed income in their retirement accounts.  Also, if you are heavily invested in highly appreciated securities, now may be the time to realize your gains at the lower capital gains rate and diversify your portfolio.)


·        Higher child tax credit.  In 2003 and 2004, the $600 child tax credit is increased to $1,000.  Taxpayers will realize the $400 savings in the form of a refund check this summer based on the filing status and income on their 2002 return.


(Establish or add a to Coverdell or Education Savings Account for your child.  These accounts allow your money to grow tax-free, provided you use the money for education expenses (including grades K-12).  The maximum annual contribution is $2,000)


·        Relief of the marriage penalty.  For couples filing a joint return, the standard deduction will increase to twice that of a single filer and the 15% bracket will expand in 2003 and 2004.


(Consider putting the savings into a traditional or a ROTH IRA.  For couples where one spouse works, establish a spousal IRA for the non-working spouse and contribute the maximum annual contribution of $3,000).


·        Relief of the alternative minimum tax.  The AMT exemption is increased to $58,000 for married-joint filers and $40,250 for single filers for 2003 and 2004.


·        Special depreciation allowance for businesses.  The recently introduced first-year depreciation allowance of 30% for certain property has been increased to 50% for property acquired after May 5, 2003 and before January 1, 2005.  ie. The first year dollar limit on depreciation deductions for passenger automobiles is increased by $7.650.


·        Expansion of Section 179 expensing for small businesses.   The existing $25,000 Sec. 179 deduction limit on certain property is increased to $100,000 for property purchased in tax years 2003 through 2005.  SUVs weighing more than 6000 pounds qualify.


(Eligible business owners should reinvest the tax savings in a qualified retirement plan.  Recently, many new retirement plans have been introduced, including the One-Person 401(k) and Safe Harbor 401(k), which make economic sense for small business owners.)


            We encourage you to contact your financial advisor to see how the new legislation may benefit you and to determine whether changes to your investment or financial plan may be appropriate.


            If you have any questions about the foregoing or any other financial matters, please call us.


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