Rhonda L. Russell, CPA/PFS is principal of Rhonda L Russell, PC, a financial planning and registered investment advisory firm, and a shareholder with Doshier, Pickens & Francis, PC, Certified Public Accountants in Amarillo, Texas. A biography on Ms. Russell may be viewed by visiting www.dpfcpa.com.

C. Marie Swift is Director of Corporate Communications for The Garrett Planning Network, Inc., a nationwide network of Fee-Only financial planners dedicated to serving people from all walks of life on an Hourly, As-Needed basis. For more information, please visit www.GarrettPlanningNetwork.com.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was signed into law May 28, 2003. Due to the ongoing political debate about the cost of the tax reductions, many of JGTRRA’s changes are temporary. Some expire as soon as 2004. Some expire and return to the scheduled changes under the previous tax act, EGTRRA. Others extend out to 2011. The net effect is a roller coaster of rate and other changes.

Tax Changes Overview
JGTRRA reduces tax liabilities in a number of areas for individuals and small businesses. It is important for you to understand how the new laws may affect your tax and financial planning.

Your personal tax and financial planning could be impacted in several ways:

1. Reduced personal income tax rates
2. Reduced capital gains tax rates
3. Reduced taxes on corporate dividends
4. Increased standard deduction for “married filing jointly” taxpayers
5. Increased child tax credit
6. Increased exemptions for Alternative Minimum Tax calculation

Reduced Personal Income Tax Rates
The personal income tax rate reductions originally scheduled by the 2001 tax law have been accelerated. As you can see in the table below, the marginal tax rates on the top four income brackets drop by at least 2%. The tax rates for the lower two income brackets remain unchanged. These new rates are scheduled to return to their pre-2001 rates after 2010, unless the Sunset Provisions in the law are repealed. The changes below are retroactive to January 1, 2003.

*The new law raised these bracket thresholds. They were previously $6,000 and $12,000 respectively.

Why is this important for your investments?

1. Your tax bracket helps determine the relative value of one investment over another and, the timing of when to liquidate an investment or take a withdrawal from a retirement plan.
2. Interest income and dividends from real estate investment trusts are now taxed at your income tax rate.
3. The decrease in personal income tax rates may make tax-free bonds less attractive and give an edge to higher-yielding taxable bonds.
4. It may be advisable to decrease the amount withheld from your paycheck and use the funds to invest in an IRA, SEP or a 401(k) if available. By increasing your retirement account contributions, you are maximizing available tax savings.

Reduced Capital Gains Tax Rates
The adjustment of capital gains taxes under JTGRAA is more complicated. The new law reduces capital gains tax rates but applies only to assets sold after May 5, 2003. Assets sold before that date fall under the old capital gains rates. Under the previous law, long-term capital gains (on assets held over one year) were taxed at either 20% or 10%, depending on your income. Those capital gains tax rates are immediately lowered to 15% and 5% respectively. For those in the lower (10% and 15%) income tax brackets, the capital gains rate is lowered to 5% through 2007, and drops to zero percent in 2008, but just for one year. As currently scheduled, in 2009 the capital gains rates will return to the old 10% and 20% levels unless the Sunset Provisions are repealed.

Investment implications: The spread between the top income and capital gains tax brackets has increased, thus making capital gains investments more valuable to those in the higher brackets. Holding investments for at least one year to get long-term capital gains is more rewarding than ever; excessive turnover is not. With less turnover, we could also see less market volatility in growth-type stocks.

For college funding, it may make sense to give appreciating assets to children approaching college age or to elderly relatives you are supporting. They can sell the assets and then pay capital gains taxes at a lower rate than you probably would.

The May 6 effective date (remember, the new capital gains law applies only to assets sold after May 5, 2003) will add complexity to returns, and the IRS is already anticipating a larger number of errors on 2003 returns due to additional lines and calculations being added to several schedules and worksheets. As always, it will be important to keep good records, with special attention to dates of transaction.

Also, the capital gains rate cuts are not across the board. Capital gains rates for some assets, such as collectibles, remains at 28% and “unrecaptured Code Sec 1250” gain is subject to a maximum 25%. The five-year property rate is gone for now. This may be problematic for those who made a “deemed sale election” in 2001 to qualify for the 18% rate, paying tax on the pre-2001 appreciation.

Reduced Taxes on Corporate Dividends
Dividends will be taxed at a 15% maximum rate. This applies to most dividends from a domestic or qualified foreign corporation. This is important because some corporations had just started paying their first-ever dividends in 2002. Reducing the taxes on corporate dividends may now serve to accelerate the trend of dividend payouts. As is currently the case, dividends, interest and capital gains within an IRA, 401(k) or annuity will continue to grow tax-deferred (in the case of a Roth IRA dividends, interest and capital gains are tax-free).

Increased Standard Deduction for Joint Filers
The standard deduction for married couples doubles immediately to twice the amount of the standard deduction for single taxpayers, but only for 2 years (the 2003 and 2004 tax years). In 2005, the standard deduction falls to 174 percent of the standard deduction for single taxpayers, and then begins gradually rising each year until it is again double the amount in 2009. This might influence a couple’s decision whether or not to itemize deductions or use the “bunching technique” to alternate between itemized and standard deductions.

Increased Child Tax Credit
The child tax credit for 2003 is $1,000 per qualifying child (a $400 increase over the prior law). What’s more, the increased amount will be paid “in advance.” Beginning in mid-July, taxpayers who filed their 2002 income tax returns by April 15 and who had “qualifying” children will receive a check from the IRS totaling $400 per child (based on the 2002 tax return information). (Those who file after April 15 will receive their child tax credit advance payment check within about six weeks of the IRS receiving the tax return.) These child tax credit payments will be treated as advance rebates against any tax liability in your 2003 income tax return. The new law does not change the income levels at which the child credit starts to phase out – $75,000 for singles, $110,000 for married couples, and $55,000 for those who are married filing separately.

Increased Exemptions for the Alternative Minimum Tax (AMT) Calculation
The Alternative Minimum Tax (AMT) was passed by Congress to ensure that all taxpayers pay at least some tax. Though intended to apply to high-income taxpayers who are able to reduce their taxes through a variety of sophisticated tax-reduction strategies, the AMT could affect middle-income taxpayers who do not do sufficient tax planning. For example, anyone who has received Incentive Stock Options (ISO’s) could be affected by the AMT.

The AMT uses a separate tax calculation, done differently from the regular tax calculation. The alternative minimum tax itself is payable only if the calculated liability under AMT is higher than the calculated tax liability using the regular tax computation method. The new law reduces the impact of the AMT by increasing the maximum personal exemption under an AMT calculation to $58,000 for married couples filing jointly (a $9,000 increase), to $40,250 for unmarried individuals (a $4,500 increase) and to $29,000 for married individuals filing separate returns (a $4,500 increase).

Conclusion
Under JGTRRA there are other tax-law changes; however, space does not permit us to discuss them all here. This would be an excellent time to meet with your tax professional and/or financial advisor to adjust your estimates of taxes due and to learn how other provisions may affect you. As always, planning pays off!