2003 New Tax Law Changes (Part II)
9/22/2003
Tax
Dear clients and friends:
We are back. Sorry for the wait and the only “legitimate” excuse we have is that reading and writing about tax code could be tiring – even for us.
Besides that, we have all good news.
3. Reduction in tax rates
The new tax law reduced all regular income tax rates above 15% for 2003 and beyond. Under prior tax law, the regular income tax rates above 15% for 2003 were 27%, 30%, 35%, and 38.6%. The new law reduced them, respectively, to 25%, 28%, 33%, and 35%. The reduced rates apply to all filers, including estates and trusts.
But estates and trusts’ income tax rates start from 15% instead of 10% and it quickly hits the 35% top bracket while the taxable income is even under $10,000. On the other side, the 35% tax rate will not start until one’s taxable income exceeds $311,950 in 2003.
Here are some numbers to show how much people can save in 2003 due to the new tax rate reduction. If your taxable income is $60,000, a single filer will save $682 while a married couple filing jointly will save $1,286. If the taxable income is $120,000, singles will save $1,882 and couples, $2,486. If the taxable income is $200,000, singles and couples will save $3,482 and $4,086, respectively.
Now, before you run out and spend the “windfall”, please read our September 22’s “Tip of the Week”. It demonstrated that even a relatively small amount of savings could bring great result in the long run. So, re-examine your financial roadmap or call us if you still do not have one. After all, everybody has a future and the best time to plan for it is now.
4. Reduction in capital gains tax rates
The 2003 new tax act also reduced the top tax rate on long-term capital gains from the sale of stocks, mutual fund shares, and certain other assets from the previous cap of 20% to 15%.
For capital gains to qualify as long-term, the assets being sold must have been held by the investor for more than twelve months. Otherwise, capital gains will be taxed at an investor’s ordinary income tax rates that could be as high as 35%.
So, an investor now should look even harder at the holding period when disposing stocks and mutual fund shares. Holding more than one year could save you as much as 133% on what you send to Uncle Sam (I.e. 20% saved over the top long-term 15% tax rate on each dollar of capital gains).
The new capital gains tax rate for taxpayers at 10% and 15% tax brackets is also reduced from the previous rate of 10% to 5%. This super low rate will be in effect through 2007 and, alas, be eliminated altogether in 2008. But that capital gains tax-free year is for 2008 only and for taxpayers in the 10% and 15% tax brackets only.
All of the new capital gains tax rates are retroactive to include any gains realized after May 5, 2003, the day that the new act was signed into law. And they are scheduled to expire at the end of 2008 so that the previous rates will come back unless the Congress takes further action.
5. Reduction in dividends tax rates
The 2003 new law also reduced the tax rates on dividend income. As you might be aware of, corporate dividends are distributed from its earnings that have been taxed at the corporate level. When individual investors pay taxes on dividends, it’s really the second time Uncle Sam gets paid on the same earnings the corporate has paid taxes.
While the notorious “double taxation” did not get removed from the tax code, the compromise is that dividends are no longer treated as ordinary income. Instead, the top federal income tax on dividends paid to individual investors by US and some qualified foreign companies are generally 15%.
Again, taxpayers at 10% and 15% tax brackets will enjoy a low 5% rate on dividend incomes. Also, like that for long-term capital gains, those taxpayers at the lower tax brackets will pay no tax at all for dividends in 2008.
New rule on dividend income is effective retroactively to January 1, 2003 and is set to expire after 2008. Should the Congress not take further action, the old rule will come back and hunt investors by 2009.
Note that the new rule does not apply to all dividend income. For example, dividends paid by real estate investment trusts (REITs) and certain tax-exempt organizations may not be subject to the new rates. Ditto for dividends from hedging transactions or under certain other particular circumstances.
