Transcript Income Tax Planning Under JGTRRA of 2003

Tax Savings Strategies
Scott A. Isdaner, CPA, J.D.
Leena Ritchie, CPA
Ruth Tanur, CPA
Isdaner & Company, LLC
Three Bala Plaza, Suite 501 West
Bala Cynwyd, PA 19004
610-668-4200
www.isdanerllc.com
Our Focus
Affected Tax Provisions
Impact on Taxpayers
Planning Ideas
Overview of “Jobs and Growth
Tax Relief Reconciliation Act
(JGTRRA) of 2003”
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Lower individual marginal tax rates
Expansion of lowest tax bracket
Marriage penalty relief
Lower taxes on capital gains and stock dividends
Increase in child tax credit
Limited alternative minimum tax relief
Increase in first year “bonus” depreciation
Increase in small business expense election
JGTRRA ’03 in short…
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$350 billion total cost
– Could balloon to over $1 trillion if cuts made
permanent
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“Front-loaded”
– Most benefits in first three years
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More “sunset” provisions
– Interaction with 2001 tax law
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Not many new elements
– Acceleration of previously enacted cuts
Acceleration of
Rate Reductions
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Rates originally scheduled to take effect in
2006 under 2001 tax law
– Accelerated into 2003 (retroactively)
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Break points adjusted for inflation
 10% and 15% brackets remain
– Expanded for most taxpayers
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Applies for 2003 through 2010
Acceleration of
Rate Reductions
2000
10% 15%
28%
31%
36% 39.6%
2001
10% 15% 27.5% 30.5% 35.5% 39.1%
2002
10% 15%
27%
30%
35% 38.6%
2003 - 2010
10% 15%
25%
28%
33%
After 2010
NA 15%
28%
31%
36% 39.6%
35%
Corporate Rate Reductions
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Accumulated earnings and personal holding
company taxes only
 “Penalty” taxes lowered to 15% from
maximum individual rate
 Applies for 2003 through 2010
Impact of Rate Reductions

Retroactive to January 1, 2003
 Lower tax for practically every taxpayer
– Heads of households must be in 25% bracket
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Withholding adjustments
– New tables issued by IRS
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Employers must use by July 1, 2003
– Larger net paychecks for all employees
– Required withholding on bonuses lowered to 25%
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Lower estimated taxes
– Increased exposure to estimated tax penalties
Impact of Rate Reductions

Overall tax liability impacting
business/investment decisions lessened
 Increased ability to save or invest
 Reduces benefit of tax-deferred and tax-free
investing
– Further affected by capital gain/dividend rates
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Deductions become somewhat less valuable
Planning for Rate Reductions
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Acceleration of income into years before
2011
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Coordinate timing of extraordinary income
with lower tax rates on dividends and
capital gains
Expansion of 10% Tax Bracket
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Small amount of savings for most taxpayers
 Reverts to old law in 2005, then back to new law
in 2008
Filing Status
Old Law
New Law
Married/Joint
$12,000
$14,000
$6,000
$7,000
Head of HH
$10,000
$10,000
Married/Sep.
$6,000
$7,000
Single
Planning for 10% Tax Bracket
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Additional incentive to shift income to
children over age 13 who have little or no
other income
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Pay children for work in family business
Expansion of 15% Tax Bracket
Congress’ latest attempt at eliminating “marriage
penalty”
 Upper limit on 15% bracket for joint filers is now
twice the single limit
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– Applies to 2003 and 2004 then resets to the old law for
2005 through 2007 before returning to the new law
amounts for 2008 through 2010
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Joint filer with at least $56,800 of taxable income
will save $935 in 2003
Planning for 15% Bracket
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Accelerate income into 2004 before joint
filer brackets revert to old law in 2005
– Applies in very narrow circumstances where
taxpayer’s income does not spill over into next
bracket
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Most taxpayers will see a tax increase as a
result of the expiration of this benefit in
2005
Increase in
Standard Deduction
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Standard deduction for joint taxpayers
increased to twice that of single taxpayers
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Applies to 2003 and 2004 only
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Does not impact taxpayers who itemize
Increase in
Standard Deduction
Year
2003-2004
Applicable % of
Single Std. Ded.
200%
2005
174%
2006
184%
2007
187%
2008
190%
2009-2010
200%
Impact of Standard Deduction
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More taxpayers will not need to itemize
– 2003 standard deduction will be $9,500 instead
of $7,950
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Certain states with federal taxable income
as the starting point for their tax returns
may end up with a revenue shortfall
– CO, HI, ID, MN, NC, ND, OR, SC, UT, VT
Planning for
Standard Deduction
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Fewer married taxpayers will need to
itemize in 2003 and 2004
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Consider deferring itemized deductions into
2005 when the standard deduction reverts to
174% of the single standard deduction
Reduction in
Capital Gains Rate
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Long-term capital gains
– Tax rate drops from 20% to 15% for most LTCGs
– 5% maximum rate for taxpayers in 10% or 15% bracket
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Rate reductions apply for sales between May 6,
2003 and December 31, 2008
– 0% rate for taxpayers in 10% or 15% bracket in 2008
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Rates apply to AMT as well
“Special” Capital Gains
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What has changed
“SUPER” LONG-TERM CAPITAL GAIN RATE OF 18%
ELIMINATED
Assets held more than 5 years from Jan. 1, 2001
Potential negative impact
Currently – not allowed to revoke election
Would need Congress to intervene & allow refund
claims
SMALL BUSINESS STOCK
AMT preference reduced from 42% to 7%
“Special” Capital Gains
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What has not changed
– 1250 depreciation recapture (real estate) - 25%
– Collectables - 28%
– Small business stock - 50% gain exclusion
 28% regular tax rate (14% effective)
– Long-term gain holding period - over 1 year
– Net capital loss limitation - $3,000 per year
Capital Gain Planning
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Defer income in year of capital gain to move into
15% (or 10%) bracket
– Pay capital gains at 5% rate (0% in 2008)
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Transfer appreciated securities to children over
age 13
– Pay capital gains at 5% rate (0% in 2008)
– Once transferred, assets are children’s property
– Disincentive to invest in Section 529 plans
Capital Gain Planning
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Net unrealized appreciation of employer
securities in qualified plan
– Lump sum distribution taxed as capital gain
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Increased value to Section 83(b) election on
restricted stock
– Timing of recognition of income and sale of
stock
Capital Gain Planning
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Reduced benefit of charitable contribution
of appreciated securities
 Installment sales
– Reduced rate applies to payments received on
or after May 6, 2003
– Accelerate receipt of installments into lower
capital gains rate years
Reduced Tax on
Certain Dividends
Compromise to Bush’s plan to eliminate
double taxation of dividends
 Applies for dividends received from 2003
through 2008
 Tax rate on dividend income reduced to
15% (5% for those in the 10% or 15%
brackets)
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– Same rates as capital gains
Eligible Dividends
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Dividends paid on or after January 1, 2003 from:
– Domestic corporation
– Qualified foreign corporation
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Traded on an established U.S. securities market
Incorporated in a U.S. possession
Certain treaty requirements between the countries are met
– Mutual funds, partnership, REIT or common trust fund
passing through either of above
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Does not include money market funds, bond funds passing
through interest, etc. even though amounts paid are classified
as dividends
Ineligible Dividends
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Dividends from:
– Credit unions (really is interest)
– Mutual insurance companies
– Stock owned for less than 60 days in the 120-day
period surrounding the ex-dividend date
– Certain preferred stock which are actually reported as
debt by the issuer
– “Extraordinary” dividends
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Exceed 10% of shareholder’s basis
If sold at a loss, treat as long-term regardless of holding period
Impact of Dividend
Rate Reduction
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Interest earned on savings accounts, CDs,
government bonds, etc. still taxed at
ordinary income tax rates
– Greater tax rate disparity
– Incentive for investors to take more risk
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No benefit for dividends held inside taxdeferred/free retirement plans
Impact of Dividend
Rate Reduction
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Dividends taxed at lower rate are not
considered investment income for purposes
of investment interest expense deduction
– Taxpayer may elect to treat any or all qualifying
dividends or capital gains as investment income
to offset investment interest expense
Impact of Dividend
Rate Reduction
Company
Kodak
GM
Duke Energy
AT&T
DuPont
GE
Yield
5.87%
5.66%
5.64%
3.85%
3.32%
2.59%
After-Tax
(Old Law)
3.61%
3.48%
3.46%
2.36%
2.04%
1.59%
After-Tax
(New Law)
4.99%
4.81%
4.79%
3.27%
2.82%
2.20%
Planning for Dividend
Rate Reduction
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Leveraging securities to purchase dividend paying
stocks
– May benefit taxpayers with significant other investment
income to offset expense without making election to
treat dividends/capital gains as investment income
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Corporate distributions to reduce
– Accumulated earnings or personal holding company tax
– Pre-S corporation earnings and profits
Increased Child Tax Credit
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$1,000 per qualifying child in 2003
– Up from $600 in 2002
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Check from U.S. Government beginning late-July
– Advance payment of increased ‘03 credit
– Based upon filed 2002 returns and age of child as of
12/31/03
– Checks will be cut weekly for extended 2002 returns
once filed
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27 million families receiving $14 billion
 Discussions to make credit amount permanent
Child Tax Credit Schedule
Year
2002
2003
2004
2005-2008
2009
2010
After 2010
Old Law
$600
$600
$600
$700
$800
$900
$500
New Law
$600
$1,000
$1,000
$700
$800
$900
$500
Impact of Child Tax Credit
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Advance payment must be accounted for on
2003 tax return
– Recompute maximum amount allowed
– New children in 2003 - full credit available
– Reduce allowable credit by amount of advanced
payment, but not below zero
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Higher incomes in 2003 than in 2002 resulting in
phase-out of allowable credit
Will result in some taxpayers getting a “bonus”
Child Tax Credit Example
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John and Jane have gross income of $60,000 on
their 2002 joint tax return
 They have two children (ages 6 and 10) in 2002
 They will receive an advance payment of $800 (2
x $400)
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If their gross income for 2003 is $500,000, they
will not be entitled to a child tax credit but there is
no mechanism for a repayment of the advance.
Advance Payment Issues
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For 2003 divorces
– Half of advance payment deemed made to each
parent
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Divorced couples who alternate the
dependency exemption
– Check will be issued to parent claiming the
exemption in 2002 although the advanced
payment is for 2003...
Advanced Payment Issues
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IRS has no information on dependents’ ages
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Further guidance may be issued in the near
future
Planning for Child Tax Credit
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Have more kids
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Watch income phase-out levels
– Control income in years that credit is higher
Alternative Minimum
Tax Relief
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Taxpayers subject to AMT
– 1999 - 1 million
– 2010 - 17 to 36 million (estimated)
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New law doesn’t change 2010 projection
– AMT exemption raised for 2003 and 2004
 $58,000 for joint filers (up $9,000)
 $40,250 for single filers (up $4,500)
 Much of increased exemption is absorbed by rate
decreases accelerated into 2003 and 2004
Planning for AMT
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Timing of items subject to AMT
– Incentive stock options
– Payment of taxes, medical and miscellaneous
itemized deductions
– Bunching of income
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Utilization of AMT credit
Increase and Extension of
Bonus Depreciation
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30% bonus depreciation created in 2001
– Purchases of qualifying property between
9/11/01 and 9/11/04
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50% bonus first year depreciation
– Property acquired after May 5, 2003
– Placed in service before January 1, 2005
– 30% rate applies to property acquired (or if a
binding written contract existed) before May 5,
2003
Qualifying Property
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Depreciable under MACRS and has a recovery
period of 20 years or less (not previously used)
 MACRS water utility property
 Computer software
 Qualified leasehold improvement property
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–
–
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Interior portion of nonresidential real property
Made by lessor or lessee
Property placed in service more than 3 yrs. ago
Certain expenditures do not qualify (enlargement,
common area, elevator, escalator, structural framework)
Bonus Depreciation Planning
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May elect out of 50% bonus depreciation
– Taxpayers may use 30% bonus or elect out of bonus
depreciation entirely
– Expect to be in higher bracket in future years
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Luxury auto limitations
– 2003 limit with 50% bonus projection -$10,710
– Large autos weighing over 6,000 pounds not subject to
the luxury auto depreciation limits
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Most states do not conform to federal bonus
depreciation rules
Increased Section 179 Expense
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Up to $100,000 expense allowed for qualifying
property (up from $25,000)
– Applies to tax years beginning after 2002 and before
2006
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Available expense election phase-out
– Dollar for dollar for qualifying property over $400,000
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Reverts to $25,000/$200,000 in 2006
 Section 179 expense comes before bonus
depreciation
Qualifying Property
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Personal property
 Tangible property
 Off-the-shelf computer software
 May be new or used property
Planning for
Section 179 Expense
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Expense election lowers AGI
– May allow for additional itemized deductions to
be utilized
– Limited to taxable income of business
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Consider not electing if taxpayer will be in
a higher bracket in the future
Planning for
Section 179 Expense
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Expense computer software (outside of
Section 179) if useful life is one year or less
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All states (except CA) conform to Section
179 rules
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