Scott E. Vincent
Vincent, Fontg & Chartier LLC
Kansas City

Congress recently passed and President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), enacting many of the provisions proposed by President Bush as part of his fiscal year 2004 budget. JGTRRA, designated by some analysts as the third-largest tax cut package in U.S. history, includes reduced tax rates for dividends and capital gains, increased expensing for small business, bonus depreciation, alternative minimum tax relief, as well as individual rate cuts, marriage penalty relief and increased child tax credits. Some of the relief provisions are retroactive, and others are prospective. In keeping with the latest trends in tax relief, many of the provisions are only enacted for a limited period of time, and sunset over varying time frames. Sunsetting these provisions kept the cost projected to the Treasury to $330 billion over the next 10 years, but some calculations estimate the true cost of the tax cuts at more than $850 billion if these provisions are extended in the future. This article highlights some of the key provisions of JGTRRA, focusing first on the business and corporate tax relief, and then reduced tax rates and other individual tax relief provisions.

Business and Corporate Tax Relief Provisions

Increased Section 179 Expensing Amounts

The new law significantly increases the § 179 first year expensing amounts for tangible personal property that otherwise would have to be capitalized and depreciated over its applicable useful life. For 2003, the § 179 amount increases from $25,000 to $100,000, and this increased amount continues, with indexing, for 2004 and 2005. In addition, the phase-out threshold for acquisitions doubles, going from $200,000 to $400,000. There are also important new details to investigate, depending on your circumstances, such as the change making "off-the-shelf" computer software eligible for § 179 treatment.

This increased § 179 deduction applies to tax years beginning after 2002 and before 2006. Thus, the new § 179 provisions are retroactive back to January 1 of this year, as compared with the effective date of the bonus depreciation discussed below.

Increased First Year Bonus Depreciation

The first year depreciation allowance of 30% (enacted as part of the Jobs Creation and Worker Assistance Act of 2002) is increased to 50% and extended to property placed in service before January 1, 2005 (2006 for certain property with longer production periods). Depreciation caps for vehicles are also increased.

It is important to note the May 6, 2003, effective date of this provision. Although the § 179 increases apply throughout 2003, applicable bonus depreciation will be 30% for acquisitions before May 6, 2003, and 50% for acquisitions on or after May 6.

Certain Special Rates Reduced

The tax rates applicable to accumulated earnings and personal holding company income are both reduced to 15% through 2008. These reductions significantly reduce the "penalties" for retaining income in certain corporations.

Corporate Estimated Tax Payments Deferred

JGTRRA provides some "time value of money" relief for corporate taxpayers by extending an estimated tax due date. Corporate estimated tax payments that would have been due on September 15, 2003, can now be deferred to October 1, 2003. Some professionals believe this deferral has more to do with deferring income into the federal government's next fiscal year than with relief for corporate taxpayers.

Rate Relief for Capital Gains and Dividends

JGTRRA provides key rate relief for both capital gains and dividends. For sales or exchanges (and payments received) on or after May 6, 2003, the new capital gains rates set forth below will apply. These lower rates also apply for alternative minimum tax purposes. These new rates (even with the individual rate relief discussed below) create a larger difference between the highest marginal tax bracket and the capital gains rate (the difference is now 20%), giving taxpayers even more incentive to structure investments and transactions so that they generate long-term capital gain rather than short-term gain or ordinary income.

Although there was political pressure to eliminate the tax on dividends, JGTRRA ultimately only lowered rates on dividend income. The new rates, however, do provide significant relief. As the table below shows, dividend income received by an individual shareholder from a domestic or qualified foreign corporation will be taxed at a maximum rate of 15% for most taxpayers, just like capital gains. "Qualified foreign corporations" are those incorporated in U.S. possessions or eligible for the benefits of certain U.S. tax treaties; dividends paid on stock of foreign companies that is traded in a U.S. equities market are also eligible for the lower rates. There are also some key exceptions from dividend income that qualify for the lower rates, including the following items:

• Dividends paid from certain exempt corporations;

• Amounts that would be deductible under § 591;

• Dividends described in § 404(k);

• Dividends under § 246(c) that do not meet the revised holding period; or

• To the extent of any payment obligation the taxpayer has under § 246(c).

The table below summarizes rates in effect following JGTRRA for the next few years. Rates highlighted in blue are pursuant to JGTRRA. Please note that prior years' tax rate relief, pursuant to the Economic Growth Tax Relief Reconciliation Act of 2001 and the Jobs Creation and Workers Assistance Act of 2002, will continue to affect capital gains rates following expiration of the JGTRRA relief provisions.

Rate Relief for Income Brackets

JGTRRA provides marginal rate relief in the top four rate brackets for this year, 2004 and 2005. As with the capital gains and dividend rates above, rate relief pursuant to 2001 and 2002 legislation will continue following sunset of the JGTRRA provisions. Of course, this prior legislation also sunsets, so rates may still return to pre-2002 levels in 2011 absent additional action by Congress and the White House.

Other Individual Tax Relief

JGTRRA also provides individual tax relief in a variety of areas, including temporary elimination of the marriage penalty, alternative minimum tax exemption increases and child tax credit increases.

Marriage Penalty Relief

The basic standard deduction for married taxpayers filing joint returns moves to twice the standard deduction for single taxpayers in 2003 and 2004. It then falls to 174% of the standard deduction for single taxpayers in 2005, followed by gradual increases back to the 200% level in 2009 and 2010, when the provisions sunset.

AMT Exemption Amount Increased

The alternative minimum tax exemption amount increases from $35,750 to $40,250 for single taxpayers and from $49,000 to $58,000 for married taxpayers filing joint returns. These provisions only apply for 2003 and 2004, and AMT exemption amounts will actually fall to less than 2002 levels in 2005 absent further legislative action.

Child Tax Credit Increased

The child tax credit increases from $600 to $1,000 per child for 2003 and 2004 under JGTRRA. Further, taxpayers whose 2002 returns indicate eligibility for the credit in 2003 will receive advance payment of the 2003 increase. The credit amount bounces around in subsequent years: $700 in 2005 through 2008; $800 in 2009; $1,000 again in 2010; and then back to only $500 in 2011 absent legislative action extending applicable provisions.

Conclusion

JGTRRA continues the recent trend in tax legislation involving temporary tax relief provisions that sunset over time. In many cases, JGTRRA provisions temporarily modify other temporary provisions for a limited time, only to have the other provisions go back into effect for additional tax years before sunsetting. The result is as complicated as my last sentence: continually changing rates and rules over the next few years that will make planning and properly reporting activities a true challenge for practitioners and our clients.