Link to special CCH Tax Briefings on key topics from 2003:
 

• Year-End Tax Legislation Update (Dec. 10)
• Corporate Income Tax and 'Bonus' Depreciation
  (Dec. 4)
• Military Family Tax Relief Act (Nov. 11)
• Jobs and Growth Tax Relief Reconciliation Act of 2003 (May 28)

CCH can assist you with stories, including interviews with CCH subject experts. Also, the CCH Whole Ball of Tax 2004 is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Neil Allen
(847) 267-2179
allenn@cch.com

Key Provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003

CCH Identifies Added Guidance Since Enactment, Open Issues

(RIVERWOODS, ILL., January 2004) – In mid-2003, for the third consecutive year, Congress passed and the president signed significant tax legislation geared toward stimulating the nation’s slow-moving and seemingly jobless economic recovery. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) benefits almost every taxpayer, although some groups will see more effect than others, such as traditional families with children, investors and small businesses, according to CCH INCORPORATED (CCH), a leading provider of tax law information and software.

Yet, the relief may be fleeting. Some provisions take full effect, then recede and build back again in subsequent years, while others will sunset, disappearing from the tax code unless a future law extends their life. The following is an overview from CCH on the 2003 law, which amended some 25 sections of the Internal Revenue Code, and further guidance that has been issued since the law was passed.

1. Reduced Taxes on Capital Gains and Dividends: Under JGTRRA, taxes were lowered on both capital gains (where the tax had been as high as 20 percent for those in the highest tax brackets) and dividends (which had been taxed at marginal tax rates). For 2003 through 2008, both capital gains and dividends are taxed at 15 percent for taxpayers in the 25-percent and higher tax brackets. For those in the 10- and 15-percent brackets, capital gains and dividends are taxed at 5 percent in 2003 through 2007, then at 0 percent in 2008. (For capital gains, the rates only apply to transactions on or after May 6, 2003.) In 2009, JGTRRA’s lower rates sunset and the tax on capital gains will revert to the prior 20-percent and 10-percent rates.

Since the 2003 law passed, the IRS has issued additional guidance, but some questions still remain regarding how to treat investments moving forward:

• Waiver on penalties for payments in lieu of dividends – Historically, agreements between brokerage firms and clients have allowed a firm to borrow stock from one customer’s street account to cover the account of another customer engaged in short selling. If a dividend were paid out during the time the first customer’s stock was being "borrowed," they received a payment in lieu of dividend rather than an ordinary dividend. As both equaled the same amount and were reported the same way, this did not matter.

However, the IRS has directed investment companies to begin distinguishing between non-qualified dividends, which will include payments in lieu of dividends, and qualified dividends. Only qualified dividends will be allowed to take advantage of the new dividend tax rates; non-qualified dividends will be taxed at the taxpayer’s marginal tax rate. CCH notes that the IRS has stated that it will show some flexibility for 2003 returns if firms do not yet have the systems in place to identify payments in lieu of dividends and taxpayers, therefore, mistakenly identify such dividends as qualified.

• Holding period for dividends – The law requires that taxpayers must hold a stock for more than 60 days during the 120-day period on either side of a dividend date to qualify for the lower dividend rates. Mutual fund companies also must comply with this law in order to report a dividend as qualified. As it currently stands, the law further applies to the individual investor in that mutual fund, requiring that they hold the mutual fund for that qualifying period. As a result, CCH notes, a mutual fund may report to an investor that a dividend is qualified because the fund has held it for the required length of time; however, if the investor has not held the fund for the required time, they are supposed to report the dividend as non-qualified for tax purposes.

• Qualified dividends in foreign corporations – Dividends from a domestic or qualified foreign corporation are taxed at the new lower rates under the 2003 law.

CCH notes further guidance has been issued to identify when a dividend is considered qualified if the foreign corporation is in a country with which the U.S. has a comprehensive income tax treatise or if the stock of the foreign corporation is readily tradable on an established securities market in the U.S.

2. Tax Bracket Changes: The 2003 legislation accelerated the reduction in marginal tax rates. The 10-percent and 15-percent marginal rates remained while the three next higher marginal rates were reduced by 2 percentage points each to 25, 28 and 33 percent and the top rate was reduced by 3.6 percentage points to 35 percent. The rates are retroactive to January 1, 2003 but are subject to expire, reverting to the 15, 28, 31, 36 and 39.6 percent rates after 2010.

The 10-percent bracket also was expanded with the income threshold increasing to $7,000 for a single filer and to $14,000 for joint filers. This provision is set to expire in 2005 under the 2003 law, but will re-emerge in 2008 under provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

CCH notes that some taxpayers may find that they receive a larger refund than anticipated as the revised IRS withholding rate tables were not required to be implemented until July 2003 and the tables did not adjust for the first six months of the year.

3. Child Tax Credit: The law boosts the credit from $600 to $1,000 effective for 2003 and 2004. The credit then falls to $700 in 2005 before increasing back to $1,000 by 2010 under the old EGTRRA schedule.

Handling of the child tax credit has caused confusion, notes CCH, particularly for divorced parents who take turns claiming a child on their tax return. Starting in July 2003, the IRS began issuing advance payments for the child tax credit calculated from taxpayers’ 2002 returns, with about 25 million households receiving checks of up to $400. If one parent claimed a child in 2002 and the other is claiming the child for 2003, this means the wrong parent would have been issued the check, and it may be up to the divorced parents to work this out on their own. The advances also are likely to cause confusion for other parents who may have misinterpreted them as refunds for 2002 rather than advances of credits for 2003.

4. Marriage Penalty Relief: The law doubled the standard deduction for married couples to twice the amount of the standard deduction for single taxpayers. This provision is only in effect for 2003 and 2004, however. In 2005, it falls to 174 percent of the standard deduction for single taxpayers and then gradually rises again to double the amount by 2009.

For 2003, this means the standard deduction for single filers is $4,750, while it is $9,500 for joint filers. CCH notes that the increase may influence some couples who may otherwise have used itemized deductions to now use the standard deduction, which could cause complexity in states that require the same deduction election for both state and federal tax returns. The higher deduction also may require more couples to pay the AMT.

5. AMT Relief: The AMT exemption was raised and is now $40,250 for single filers and $58,000 for joint filers, but only for the 2003 and 2004 tax years.

Business Provisions

The Act has two measures designed to encourage business spending on new equipment.

1. Small Business Expensing: The new law increases business expensing under Code Section 179 to $100,000 in qualified property placed into service for the year. The phase-out threshold at which the expensing amount is reduced also increased to $400,000.

2. Bonus Depreciation: The first-year bonus depreciation increases to 50 percent for property that was acquired after May 5, 2003 and before January 1, 2005. This bonus depreciation applies on top of regular depreciation. The law also raised the bonus depreciation that could be taken for automobiles from $4,600 to $7,650.

Since the law passed, temporary regulations were issued creating a new, more favorable depreciation schedule for light trucks and vans, which historically had been limited to the lower automobile depreciation rates. CCH notes that with JGTRRA’s 50-percent bonus depreciation, the 30-percent bonus depreciation issued under the 2002 Job Creation and Worker Assistance Act, the regular depreciation rates and the various categories of vehicles, there are now about 10 depreciation tables just for vehicles.

About CCH INCORPORATED

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served more than four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, accounting, legal, securities and small business markets. CCH is a Wolters Kluwer company. The CCH Federal and State Tax group, CCH Tax Compliance and Aspen Publishers Tax and Accounting group comprise the new Wolters Kluwer Tax and Accounting unit. The unit’s web site can be accessed at tax.cchgroup.com.

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