2003 New Tax Law Changes (Part I)
8/25/2003
Tax
Dear clients and friends:
As you might be aware of, the new Jobs and Growth Tax Relief Reconciliation Act of 2003 is the third-largest tax cut in the US history and includes some significant tax relief for many individuals, investors and businesses.
We want to highlight for you how the new law may affect you and/or your business, what’s coming in the future years and why tax and financial planning has become more complex yet more important than ever before.
We know you may dislike taxes or at least the tax code. So do we. To keep you awake, we’ll try to be brief and light and only put out a portion of this letter at a time.
1. More income to be taxes at the lowest rate–good news but it may not last for long
Under our “progressive” tax system, a taxpayer’s income (after adjustments, deductions and exemptions) is taxed first at the lowest rate (10%) then gradually at a higher and higher rate. And that is true even for Mr. Gates.
For 2003, a single taxpayer’s first $7,000 taxable income will be taxed at 10% (up from $6,000 before the new law came into effect). As the next tax bracket is 15%, the $1,000 “expansion” results in a maximum tax saving of $50 – not a whole lot but nobody should mind.
For a married couple filing jointly, the lowest rate now covers the first $14,000, up from $12,000. Of course, the $2,000 increase produces a maximum tax saving of $100 for the couple in 2003.
For 2004 only, the taxable income levels for the 10% bracket will be adjusted for inflation. In other words, if we are lucky enough not have to worry about deflation next year, the lowest tax bracket might apply to a slightly larger amount of taxable income (thus we all will send to Uncle Sam a little less of our hard earned money).
Then, the good news almost stops after 2004. If Congress does not take any new action, the 10% bracket will shrink back to $6,000 for single taxpayers and $12,000 for married filing jointly from 2005 to 2007.
Then, from 2008 it will expand again to $7,000 and $14,000, respectively and be adjusted annually for inflation after 2008. However, barring Congressional action, the 10% bracket will disappear altogether from 2011 (so that the lowest tax rate will be 15%).
That simple “inaction” of Congress, if it turns out to be true, would increase a single taxpayer’s tax by at least $350 a year (I.e. $7,000*[15% - 10%], without considering inflation), and $700 for a couple after 2010. Ouch! That hurts.
2. Expansion of 15% tax bracket for married couples
Have you heard enough about that infamous “marriage penalty” in our tax system? This time Congress is doing something about it. At least for a while.
Under the old law, a joint filer’s 15% for 2003 would start from $12,000 and end at $47,450 of taxable income. Under the new law, the 15% tax bracket for a couple filing jointly applies to taxable income over $14,000 up to $56,800 (which is twice the $28,400 end point of the 15% tax bracket for singles).
In short, assume a married couple filing jointly has exactly $56,800 of taxable income in 2003. They would pay $1,222 less in Federal income tax (before credit) than what they would have to pay under the old law. (Trust us on those numbers - we omitted the detail calculation so you don’t get bored too quick).
Well, the good news stops after 2004 again. Unless Congress takes action, the size of the 15% tax bracket for joint filers will drop from 2005 to 2007. Then, from 2008 to 2010, the 15% tax bracket for joint filers will expand to twice of the single filer’s as that for 2003 and 2004.
After 2010, the end point of the 15% will go back to the old law before 2003. But wait a minute! Isn’t our income tax system a progressive one? It sure looks “regressive” here.
Worse yet, the “marriage penalty” never really disappeared from the tax code. Even in 2003 and 2004 the relief only comes in at the 15% tax bracket. A marriage-penalty effect still operates in all higher tax brackets and, a quicker loss of itemized deductions and personal exemptions for married couples (comparing with two single filers) are all live and well.
Where are all those politicians who tell everyone that family is the most fundamental institution of our society? We should ask them to mark their words next time.
