In May of 2003, Congress enacted and President Bush signed a $350 billion package of tax cuts and other provisions aimed at stimulating the economy and creating more jobs.  The purpose of this article is to provide a brief overview of this important new legislation and to point out potential planning opportunities.

The legislation accelerates to January 1, 2003 marginal rate cuts, marriage tax relief and increases in the child tax credit which were to be phased in under law enacted in 2001. The 38.6% top bracket is now reduced to 35%, the 35% bracket is reduced to 33%, the 30% bracket is reduced to 28%, and the 27% bracket has been reduced to 25%.

The legislation immediately increases the amount of the child tax credit to $1,000 for 2003 and 2004. 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 tax returns filed for 2002. Note that there are income limitations as to your eligibility for this tax credit.

The legislation accelerates marriage penalty relief, making it effective January 1, 2003. First, the amount of the standard deduction for married taxpayers is increased to twice the basic standard deduction amount for single individuals. Second, the legislation increases the size of the 15% regular income tax bracket for married taxpayers filing joint returns to twice the width of the 15% regular income tax bracket for single returns.

There is a reduction in the individual capital gains rates and in the taxation of dividends received by an individual shareholder. The legislation reduces the 10 and 20% rates on net capital gains to 5 and 15%, respectively. The lower rates apply to assets held more than one year and to sales and exchanges (and payments received) on or after May 6, 2003 and before January 1, 2009.

The legislation provides that dividends received by an individual shareholder from domestic and qualified foreign corporations generally are taxed at the same rates that apply to capital gains. Thus, under the new law, dividends received in taxable years beginning after 2002 and before 2009 will be taxed at rates of 5 and 15%.

The provisions with respect to capital gains and dividends may provide significant planning opportunities, particularly for closely held business owners. Those business owners who have personal holding companies and those who previously considered electing to be taxed as an S corporation (which generally has the benefits of only a single level of tax at the shareholder level for federal income tax purposes), but could not make that election due to accumulated earnings and profits, should consult their tax advisors regarding the feasibility of declaring a dividend at the reduced rates and then making the election.

The legislation contains special incentives for certain purchases of qualifying property, typically equipment. Qualifying property acquired after May 5, 2003 and before January 1, 2005 that is used in a trade or business may be eligible for a first-year depreciation deduction equal to 50% of the cost of such property. These strong tax incentives certainly make an economic difference to those who are uncertain as to whether a purchase is feasible or not.

The legislation increases the amount that small businesses can expense on purchases of qualifying property from $25,000 to $100,000 for 2003 through 2005. The definition of a “small business” has also been expanded by the legislation.

One likely byproduct of this new law is the increase in the number of taxpayers affected by the alternative minimum tax (“AMT”), which was implemented to ensure that at least a minimum of income tax is paid by taxpayers (be it corporate, individuals, or trusts and estates) who obtain large savings from certain tax deductions and exemptions including, without limitation, state and local taxes, miscellaneous itemized deductions and certain depreciation deductions. The reduction in rates, coupled with only a modest increase in the AMT exemptions, will undoubtedly result in many more people paying AMT. Consult your tax advisor to determine if you or your business may be subject to the AMT, and possible ways to avoid the AMT.

There are other provisions contained in the legislation that are beyond the scope of this article. You should, however, consult your tax advisor as to whether or not you are affected by such provisions or if you have questions regarding those outlined above.