United States: Jobs And Growth Tax Relief Reconciliation Act Of 2003

On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act"), which is being touted as the third largest tax cut package in U.S. history. The Act includes several tax rate reductions, business incentives and various individual tax benefits. In order to obtain Congressional approval, President Bush agreed to limit the cost of the package to $330 billion over the next 10 years. Consequently, there is a roller coaster of rate changes and sunsetting provisions during the next 10 years.

Accelerated Reductions in Individual Income Tax Rates: In 2001, the Bush Administration signed into law a tax package which gradually reduced individual tax rates over a 10-year period and such tax rate reductions were scheduled to sunset after 2010. Under the Act, all of the rate reductions previously approved in 2001 take immediate effect retroactive to January 1, 2003, which results in significant tax reductions for many individuals. The provision does not modify the application of the present-law sunset to the rate reductions as passed in 2001. Accordingly, all of these rate reductions will expire after 2010. The table below summarizes the applicable tax rates on a year-by-year basis over the next 10 years. Along with the rate reductions, the Act also accelerates the increase in the taxable income levels for the 10-percent rate bracket so that the income levels currently scheduled for 2008 become effective in 2003 and 2004. As such, for 2003, the taxable income level for the 10-percent regular income tax rate bracket for single individuals is increased from $6,000 to $7,000, and for married taxpayers filing a joint return from $12,000 to $14,000. For 2004, these amounts are indexed for inflation. For taxable years beginning after December 31, 2004, the taxable income levels for the 10-percent rate bracket revert to the levels provided under present law.

Reduced Individual Capital Gains Rates: The Act reduces the 10 and 20 percent rates on net capital gains to 5 percent (zero in 2008) and 15 percent, respectively. The new Act applies to sales and exchanges (and payments received) after May 5, 2003 and before January 1, 2009. The capital gains rate cut is not across the board. Gains realized from collectibles will continue to be taxed at a 28% rate, and unrecaptured real property depreciation will continue to be taxed at a 25% rate.

Dividend Tax Relief: Under the new Act, dividends received by individual investors from domestic or "qualified foreign corporations" are taxed at the same rates that apply to net capital gains. Accordingly, qualified dividends will be eligible for the lower 5 and 15 percent rates that apply to net capital gains. Under prior law, dividends were taxable at ordinary income tax rates, which could be as high as 38.6 percent. Dividends received from REITs, however, generally will not qualify for the new, lower dividend tax rate. Accordingly, REIT investments will not be as attractive from a tax standpoint as compared to other equity investments that generate net capital gains and dividend income. Qualified foreign corporations include (i) foreign corporations eligible for the benefits of a comprehensive income tax treaty with the United States, and (ii) foreign corporations whose stock is traded on an established securities market in the United States. The Act will undoubtedly encourage more investment in qualified foreign stocks. The dividend tax cuts apply to taxable years beginning after December 31, 2002 and beginning before January 1, 2009.

50% 1st Year Bonus Depreciation: The Act allows a taxpayer to claim an additional 1st year "bonus" depreciation equal to 50% of the adjusted basis of qualified property (the "50% Bonus"), unless the taxpayer elects out of the bonus first year depreciation. The remaining 50% of basis will be depreciated according to the applicable depreciation schedule. The definition of "qualified property" is generally restricted to property having an applicable depreciation recovery period of 20 years or less. In order to qualify for the 50% Bonus, the original use of the property must begin with the taxpayer and must have been acquired by the taxpayer after May 5, 2003 but before January 1, 2005. The property must also be placed in service by the taxpayer before January 1, 2005. Property does not qualify if there was a binding contract for acquisition of the property prior to May 6, 2003. Property for which the 50% Bonus depreciation is elected will not be eligible for the prior first year 30% bonus depreciation enacted in 2001.

Increased Business Expensing Limit: The Act provides that the maximum dollar amount that may be deducted under Section 179 of the Code is increased from $25,000 to $100,000 for property placed in service in taxable years beginning in 2003, 2004 and 2005. In addition, for purposes of the phase-out of the deductible amount, the prior $200,000 amount is increased to $400,000 for property placed in service in taxable years beginning in 2003, 2004 and 2005. The dollar limitations are indexed annually for inflation for taxable years 2003 and before 2006. Qualifying property continues to be defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. The new Act permits taxpayers to expense off-the-shelf computer software, which was generally not treated as qualified property under prior law.

Accelerate Marriage Penalty Relief: The Act provides that the basic standard deduction amount for married taxpayers filing a joint return is twice the basic standard deduction amount for single individuals for 2003 and 2004. For taxable years beginning after 2004, the relationship between the standard deduction for joint filers and single filers reverts to present law. The Act also increases the size of the 15-percent regular income tax rate bracket for married taxpayers filing joint returns to twice the width of the 15-percent regular income tax rate bracket for single returns for taxable years beginning in 2003 and 2004. For taxable years beginning after 2004, the rate brackets revert to present law.

AMT Relief: The Act increases the alternative minimum tax exemption amount for married taxpayers filing joint returns to $58,000 (up from $49,000) and for single taxpayers to $40,250 (up from $35,750) but only for tax years beginning in 2003 and 2004.

Child Tax Credit: Under prior law, the child tax credit was scheduled to be $600 for 2003 and 2004. The new Act immediately increases the child tax credit to $1,000 for 2003 and 2004. After 2004, the amount of the credit reverts to the level provided under prior law. For 2003, the increased amount of the child tax credit (up to $400) will be paid in advance, beginning in July 2003, based on the information contained in the taxpayer's return for 2002.