2003 Tax Changes

Farm Business Management Update, August/September 2003

By Daniel Osborne

Once again, new tax law is in effect for this year. The Job and Growth Tax Relief Reconciliation Act of 2003 was signed by President Bush in May this year. With its passage came several notable tax changes. Below is a brief summary of the effects of the 2003 Tax Act. Table 1 diagrams the 10-year tax outlook.

• Rate Reduction - The new law reduces the higher marginal tax rates. The tax brackets were 10, 15, 27, 30, 35, and 38.6%, but for the tax year 2003 through 2010 they are 10, 15, 25, 28, 33, and 35%.
• Expanded 10% Tax Bracket - For the years 2003, 2004, 2008, 2009, and 2010, the income threshold for the 10% tax bracket is increased from $6,000 to $7,000 for single filers and from $12,000 to $14,000 for married filers. During these specific years, the increased threshold will save single filers $50 and married filers $100 if they meet or exceed the income threshold.
• Marriage Penalty Relief - The marriage penalty is reduced because of two new changes. For the years 2003 and 2004, the 15% tax bracket is increased for married filers to twice the amount for single filers. Also for the years 2003 and 2004, the standard deduction for married filers is increased to twice the amount for single filers.
• Child Tax Credit Increase - The child tax credit is increased from the current amount of $600 to $1,000 for the years 2003 and 2004. This credit falls to $700 for the years 2005 through 2008, increases to $800 for 2009, and finally returns to $1,000 for 2010.
• Capital Gains Rate Reduction - The 20% capital gains rate is reduced to 15% for sales and exchanges between May 6, 2003 and December 31, 2008. For the same time period, the 10% capital gains rate for lower-income taxpayers is reduced to 5% through 2007 and 0% for 2008. The 8% and 8% capital gain rates for property held at least 5 years are effectively repealed until 2009.
• Dividends Taxed as Capital Gains - For the tax years 2003 through 2008, dividend income for most taxpayers will be taxed as capital gains at the rates discussed above instead of as ordinary income. There are several exceptions that will not apply to most taxpayers.
• Increase in §179 Business Expensing - Instead of depreciating capital purchases, Code Section 179 allows businesses to immediately deduct up to $25,000 of the cost of qualified property in the current year subject to a $200,000 threshold. For the tax years 2003 through 2005, the Section 179 allowance is increased to $100,000, and the threshold is increased to $400,000.
• Bonus Depreciation - Last year we saw the institution of the 30% Bonus Depreciation for certain qualified property. For purchases after May 5, 2003 and before January 1, 2005, the Bonus Depreciation amount is increased to 50%.
• Other - There are other provisions that do not apply to most taxpayers and, therefore, not discussed in this letter. These include Alternative Minimum Tax (AMT) Preference for Excluded Gain Adjusted, AMT Exemption Amount Increased, Regulated Investment Companies and Real Estate Investment Trusts Rules Coordinated with New Dividend Tax, Collapsible Corporation Rules Repealed, Personal Holding Company Tax Rate Reduced, Corporate Estimated Tax Payments Deferred, and States Receive Temporary Fiscal Relief.

Most people think little about their taxes until after the first of the year. However, the majority of tax strategies require action before the year's end. Therefore, considering these changes early and adjusting your tax plan accordingly is important.

Source: CCH Tax Briefing: Job and Growth Tax Relief Reconciliation Act of 2003, May 28, 2003.

Table 1: 10-Year Tax Outlook

The chart below provides important tax related amounts and percentages that generally apply for the years 2002 through 2011. Changes resulting from the 2003 Tax Act are reflected in the shaded areas.
	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
Income Tax Rate Reductions
Top Bracket	38.6%	35%	35%	35%	35%	35%	35%	35%	35%	39.6%
Fifth Bracket	35%	33%	33%	33%	33%	33%	33%	33%	33%	36%
Fourth Bracket	30%	28%	28%	28%	28%	28%	28%	28%	28%	31%
Third Bracket	27%	25%	25%	25%	25%	25%	25%	25%	25%	28%
Second Bracket	15%	15%	15%	15%	15%	15%	15%	15%	15%	15%
First Bracket	10%	10%	10%	10%	10%	10%	10%	10%	10%	No 10% bracket
Expansion Of 10% Bracket
Threshold for Joint Filers	$12,000	$14,000	$14,000	$12,000	$12,000	$12,000	$14,000	$14,000	$14,000	No 10% bracket
Threshold for Single Filers	$6,000	$7,000	$7,000	$6,000	$6,000	$6,000	$7,000	$7,000	$7,000	No 10% bracket
Marriage Penalty Relief
Standard Deduction for Joint Filers - Percentage of Single Amount	Did Not Apply	200%	200%	174%	184%	187%	190%	200%	200%	Will Not Apply
15% Bracket Size for Joint Filers Compared to Single Filers	Did Not Apply	200%	200%	180%	187%	193%	200%	200%	200%	Will Not Apply
Child Tax Credit
Amount per Child	$600	$1,000	$1,000	$700	$700	$700	$700	$800	$1,000	$500
Capital Gains
Capital Gains Rate	20	15%	15%	15%	15%	15%	15%	20%	20%	20%
Rate for Low Income Taxpayers	10	5%	5%	5%	5%	5%	0%	10%	10%	10%
Dividends (Taxed As Capital Gains)
Dividend Rate	Did Not Apply	15%	15%	15%	15%	15%	15%	----------- Will Not Apply -----------
ate for Low Income Taxpayers	Did Not Apply	5%	5%	5%	5%	5%	0%	----------- Will Not Apply -----------
Code Sec. 179 Expensing
Deduction Amount	$24,000	$100,000	$100,000	$100,000	$25,000	$25,000	$25,000	$25,000	$25,000	$25,000
Investment Limitation	$200,000	$400,000	$400,000	$400,000	$200,000	$200,000	$200,000	$200,000	$200,000	$200,000
Bonus Depreciation
Bonus Depreciation Percentage	30%	50%*	50%	---------------------------------------- Will Not Apply --------------------------------------
* Increases to 50% for purchases after May 5, 2003
Source: CCH Quick Tax Facts, 10-Year Tax Forecast

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