What's New This Year

For the third year in a row, taxpayers will reap the benefits of another major tax-cut package, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). Taxpayers will begin seeing the tax benefits from this tax-cut package immediately in 2003. Many of the changes in 2003 are also the result of tax cuts being phased in from the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Job Creation and Worker Assistance Act of 2002.

Here are some highlights of changes in effect for 2003:

Tax-rate reduction. Lower income tax rates of 10, 15, 25, 28, 33, and 35 percent apply beginning in 2003 and through 2010.

Personal exemption amount. This amount has increased to $3,050 per person for 2003.

Standard deductions. Standard deduction amounts have increased for 2003 as follows: singles and married filing separately, $4,750; heads of household, $7,000; married filing jointly, $9,500.

Marriage penalty relief. The marriage penalty is reduced by an increase of the 15 percent tax bracket for joint filers to twice that of single filers in 2003 and 2004. The basic standard deduction amount for married taxpayers (see above) is also twice that of single taxpayers for 2003 and 2004.

Child tax credit. The child tax credit has been increased to $1,000 per child for tax years 2003 and 2004 (formerly $600 per child). For 2003, many taxpayers have already received the $400 per child credit increase in the form of advance payments issued in 2003.

Child and dependent care credit. Beginning with the 2003 tax year, the maximum amount of eligible dependent care expenses for the dependent care credit increases from $2,400 to $3,000 if there is one qualifying dependent and from $4,800 to $6,000 if there are two or more qualifying dependents. The percentage that can be claimed increases from 30 percent of qualifying expenses to 35 percent. This means the maximum amount of the credit has increased to $1,050 for the care expenses of one qualifying person and $2,100 for the expenses of two or more qualifying persons. In addition, the income level at which credit amounts phase down rises from $10,000 to $15,000, allowing more taxpayers to receive the full benefit of the credit.

Expatriate exemption. If you're working abroad in 2003 and 2004, the first $80,000 of your earnings continue to be exempt from U.S. income taxes.

Depreciation bonus. Thanks to a JGTRRA provision, businesses may be eligible for an additional first-year depreciation deduction equal to 50 percent of the value of certain types of qualified property acquired after May 5, 2003, and placed in service before January 1, 2005. For property acquired before May 6, 2003, a 30 percent depreciation deduction is still available. Any extra depreciation deduction taken can be used in addition to the small business expensing election (see below).

Equipment expensing election. The amount of equipment that can be written off in the same year it was purchased is increased dramatically to $100,000 (only $24,000 in 2002). The threshold amount for qualifying property is increased from $200,000 to $400,000. Also, off-the-shelf computer software is now eligible for the expensing election.

Capital gains tax rate. The maximum capital gains tax rate for most net capital gains taken into account after May 5, 2003, is reduced to 15 percent (five percent for those in the lowest two income tax brackets).

Dividends tax rate. The maximum dividends tax rate for qualified dividends is down to 15 percent (five percent for those in the lowest two income tax brackets).

Work opportunity credit. Businesses who hired workers in certain disadvantaged groups can continue to get a credit of up to 40 percent of their first-year wages for employment of 400 or more hours, and up to 25 percent for employment of more than 120 but less than 400 hours. This credit continues to be in effect through 2003.

Standard mileage rate. The standard mileage rate for determining your deduction for the business use of a car has increased to 36 cents per mile for 2003 (12 cents per mile when computing deductible medical or moving expenses and 14 cents per mile when giving services to a charitable organization).

Lifetime learning credit. The maximum amount of this credit has doubled to $2,000 in 2003.

IRA deduction. The maximum IRA deduction allowed per person is $3,000 through 2004. Also through 2005, those who are at least 50 years old can make an additional catch-up contribution of $500 to their IRA each year.

Alternative minimum tax (AMT) exemption. The AMT exemption amount has increased to $40,250 for singles; $58,000 for joint filers or qualifying widow(er)s; and $29,000 if married filing separately.

Adoption tax credit. In 2003, the credit will be available for special needs adoptions in the year they are finalized, whether the taxpayer has eligible expenses in that year or not.

Self-employed health insurance deduction. The amount of health insurance coverage a self-employed individual can deduct for themselves finally increases to 100 percent in 2003.

Retirement plan elective deferral limits. An employee's maximum salary deferral to a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan increases to $12,000 in 2003. Elective deferrals to a SIMPLE plan increase to $8,000. Those that are age 50 by the end of 2003 may make an additional catch-up contribution of $2,000 to most types of plans (SIMPLE plan participants can add an additional $1,000 in 2003).

Where to mail your return. The IRS has changed the mailing addresses for filing your return, so make sure that your return gets to its proper filing location.

Changes Beyond 2003

It would easily take an entire book just to explain the many tax law changes enacted in 2001 through 2003 that will continue to be phased in through 2010. The following, however, are some of the other highlights you can look forward to in the years to come:

Marriage penalty relief. For 2005, 2006, and 2007, the 15 percent bracket for joint returns is 180, 187, and 193 percent, respectively, of the 15 percent bracket for single taxpayers. In 2008 through 2010, the 15 percent tax bracket of joint filers is once again twice that of single filers.

After 2004, the standard deduction for married taxpayers falls to 174 percent of the standard deduction for single taxpayers and then gradually returns to double the single taxpayer's amount in 2009 and 2010.

Estate taxes. The amounts that can be excluded from estate for estate tax purposes will increase to $1.5 million in 2004 and 2005; $2 million in 2006 through 2008; and $3.5 million in 2009. Estate taxes will be repealed for those dying in 2010, but may return unless Congress acts to make the repeal permanent.

Child tax credit. The child tax credit falls to $700 in 2005 through 2008; increases to $800 in 2009; and returns to $1,000 per child in 2010.

Retirement plan elective deferral limits. An employee's maximum salary deferral to a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan will increase to $13,000 in 2004 and an additional $1,000 each following year through 2006. Those 50 years or older can make additional catch-up contributions to their plans of $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006 and thereafter.

Elective deferrals to a SIMPLE plan increase to $9,000 in 2004 and to $10,000 in 2005 and thereafter. SIMPLE plan participants who are age 50 and over can make additional catch-up contributions of $1,500 in 2004, $2,000 in 2005, and $2,500 in 2006 and later years.

Standard mileage rate. The standard mileage rate for determining your deduction for the business use of a car will decrease to 37.5 cents per mile in 2004 (14 cents per mile when computing deductible medical or moving expenses and when giving services to a charitable organization).