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SPECIAL BULLETIN - JULY 2003

1. Highlights of the 2003 Tax Act

2. The Economy:  What It Means To Us 

3. Mortgage Rates

4. Sale of Life Insurance Policies

July, 2003

This Special Bulletin was prompted by the $350 billion tax cut bill¹ signed into law on May 28^th by President Bush.

Before delving into provisions that will reduce your tax bill, I’d like to give you my viewpoint on the ‘big picture’.

In June 2001, President Bush signed into law the Tax Act of 2001. The law provided for $1.3 trillion of tax relief over the next 10 years, with all provisions expiring after December 31, 2010.

Under the Congressional Budget Act of 1974, Congress adopted procedures to attempt to control its own spending.  In 1990, the Budget Act incorporated the Byrd rule, which meant that any provision that would increase the deficit for a fiscal year beyond those covered by the measure is subject to that procedure. In simple English, under the Byrd rule, unless Congress takes affirmative action, the provisions of the Tax Act of 2001 will ‘sunset’ (terminate) after December 31, 2010. As I understand it, if there are no surpluses as projected by the year 2011, the Act will sunset.  If there are surpluses as projected, then sunset is repealed and the Act continues on. Unless of course, events in 2010 dictate that Congress take new action.

The 2001 Act was tail-end loaded:  Tax reductions of $475 billion took effect in the first 5 years, and $875 billion in the last 5 years.  The 2003 Tax Act merely accelerates, temporarily, a number of individual tax reductions that were enacted in 2001 with delayed effective dates.

The Richards explanation . . . The U.S. economy has been stalled for too long and too many people are out of work. Fund raising for the 2004 Presidential elections has begun. The election is 1-1/4 years away. It takes time to turn the economy around. The confluence of these situations made it prudent for the President to take action. The acceleration of some of the provision of the 2001 Act make good sense, and will put money into the hands of the public.

Whether or not the 2003 Act will heat up the economy, remains to be seen.  Alan Greenspan has lowered interest rates to a 45-year low and that hasn’t helped. I personally believe that the old tricks won’t work because we are now, for the first time ever, in a true global economy. There will be a learning curve before our economists can figure out the ‘new world economic order’.

what should you do about the tax act? Changes in the relative tax rates on ordinary income, dividends, and capital gains mean possible reconsideration of savings and investment decisions. The potential that most of the changes will eventually be extended, and the temporary nature of the lower rates on capital gains and dividends makes long-term planning difficult.  Two good solutions for making sense of the 2003 Tax Act are: continue to make your business and investment decisions based on sound, basic economic considerations rather than be tax driven, and; seek advise from your tax-planning professional.

My very best wishes for the summer.

Your resource for all of your tax, financial, and business planning matters,

Lawrence L. Richards, C.P.A.

¹ Public Law 108-27, The Jobs and Growth Tax Relief Reconciliation Act of 2003.

To ensure compliance with revised Treasury Regulations under Circular 230, this is to advise you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties under the Internal Revenue Code that may be asserted against the taxpayer, or (2) promoting, marketing or recommending to another party any matters addressed herein. A taxpayer may rely on professional advice to avoid federal tax penalties only if that advice is reflected in a comprehensive tax opinion that conforms to stringent requirements under federal law.

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HIGHLIGHTS OF THE 2003 TAX ACT

In attempting to provide an overview of provisions, not all the details are included.  Therefore, do not attempt to make tax judgments from this material.  If you believe a provision applies to your situation and would like to know how your personal situation is impacted, you should contact your tax-planning advisor.

Effective for 2003 and 2004

Marriage penalty (limited) relief  - The taxable income amounts in the 15-percent bracket for married couples is increased to twice the amounts for single taxpayers. Similarly, the standard deduction for married couples is increased to double the amount for single taxpayers. The 15-percent bracket decreases in 2005 and is phased up in 2006 and 2007; from 2008 to 2010 it is the same as 2003.

Acceleration of (temporary) increase in the 10 percent bracket – The top of the 10% bracket is increased in 2003 instead of 2008, bringing more taxpayers into the 10% bracket.

Acceleration of tax rate reductions - The rate reductions scheduled for 2006 and thereafter take effect in 2003 and remain that way until 2010. The new 2003 brackets are 25%, 28%, 33%, and 35%. This is a real tax benefit for all taxpayers. (Note:  New withholding tables have been sent to all employers recommending its use beginning July 1^st.)

Alternative minimum tax (temporary) relief – The AMT exemption amounts have been increased (which reduces the AMT tax) for 2003 and 2004, reverting to the pre-2001 amounts after 2004.

Increase (temporarily) in child tax (non-refundable) credit  - The tax credit for qualifying children supported by the taxpayer is increased to $1000 per child in 2003 and 2004, instead of in 2010. The credits are reduced in 2005 to 2009 to the 2001 Act levels. The IRS will mail advance payments to taxpayers of the 2003 rebates of $400 per qualifying child between July 25 and October 1, 2003.  If you do not receive the rebate, and are entitled to the full $1,000, you will claim it on your 2003 tax return. Retain the notices of your advance payment amounts and inform your tax preparer.

Effective for 2003 to 2008

Reduction in capital gains rate (for both regular and AMT tax) – The 20% maximum rate on net capital gains is reduced to 15% for individuals, estates, and trusts for capital assets sold or exchanged (and to installment payments received) on or after May 6, 2003 and continuing through 2008. For taxpayers in the 15% and 10% regular tax brackets, the 10% capital gains rate is reduced to 5% starting May 6, 2003 and is reduced to zero for 2008 only. The capital gains rates return to 2002 levels in 2009.

Note:  The maximum capital gain rates do not apply if they are higher than the taxpayer’s regular tax rate.  There is no change to the rates on short-term capital gains, which continue to be taxed at ordinary income rates.

Reduction in tax rate on dividends – The same 15% (or 5%) maximum tax rate that applies to net capital gains also applies to dividends paid by most domestic and foreign corporations. The new rates are effective for dividends received after 2002 and through 2008.  Most, but not all, of the dividends from a regulated investment company (generally a mutual fund) and real estate investment trusts (REIT) will not be eligible for the reduced tax rate.

Miscellaneous – From 2003 to 2008 the collapsible corporation rules are repealed, and the accumulated earnings tax and personal holding company tax rates have been reduced.

Business Provisions

Bonus depreciation – This provision was enacted to stimulate investments by business in depreciable property. This is an excellent tax break.

30% bonus depreciation has been extended to property  placed in service before January 1, 2005

50% bonus depreciation has been added for property placed in service after May 5, 2003 and before January 1, 2005.

You can elect to use the 30% or the 50% bonus, or neither, on a property-by-property basis.

Example: Company XYZ purchasing $1 million of equipment may elect to take bonus depreciation of $500,000, with the balance subject to the regular depreciation rules.

Certain passenger automobile weighing 6000 pounds or less have limitations placed on the amount of 30% or 50% bonus depreciation that can be taken. However, vehicles with a gross weight over 6000 pound – like many SUVs – are not subject to the limited bonus depreciation and hence the full 30% or 50% amounts apply.

Increased section 179 expensing – This section allows a taxpayer to deduct a portion of the cost of certain business property instead of depreciating it. This is another excellent tax break. The Act increases the amount that can be deducted from $25,000 to $100,000, increases the level of expenses above which the deduction is further limited from $200,000 to $400,000, and permits revocation of the election to expense without IRS consent. These new rules are in effect for 2003 through 2005.

Example of section 179 expensing and bonus depreciation:
Taxpayer purchases $400,000 of qualifying MACRS property. The maximum deduction is $280,000. (400,000 – 100,000 section 179 expensing = 300,000 – 150,000 of 50% bonus depreciation = 150,000 – 30,000 of MACRS first-year table percentage = 120,000 remaining undepreciated cost.

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The Economy (and what it means to us) (or – a case for strategic planning and business management)

Almost every article about the economy reports optimistic and pessimistic information: “stock prices fell and bond yields jumped as investors weighed conflicting reports about the health of the U.S. economy”, “two economic reports gave hopeful signs that the nation’s economy is improving, despite some downbeat data on June employment trends”, “despite repeated assertions that it’s now on the mend, the economy has lost 324,000 jobs so far this year and grew at an anemic 1.9% pace during the first three months on the year”.  What can be deduced from the news?  How do we balance our budgets and run our businesses from the information we hear and read about?

My solution is to stick to basics. In good times, prepare for bad times.  In bad times, prepare for good times.  For surely, one will follow the other.  It’s only a question of time. But you must be prepared, personally and for your business, for the inevitable change of fortune.

Mortgage Interest Rates

In September 2001 and again in July 2002 I reminded my clients and friends that mortgage rates were dropping to new lows (and they did). Well, once again, and for the last time, if you are considering a refinance or home purchase, the rates are still lower than those previous two lows (and I believe they will be going up shortly). If you are interested in a new home loan or a refinancing, I can help facilitate the transaction and make the process painless.  Contact me for details.

Sale of Life Insurance Policies

Most people do not know about this because insurance carriers and agents do not broadcast this information. There is a secondary market for the sale of life insurance policies that you may not be aware of. Under certain circumstances, when you no longer need or can no longer afford to maintain the insurance coverage, instead of surrendering the policy for its cash value or letting it lapse, or taking a reduced paid up policy, you may be able to sell the policy to a life settlement provider for substantially more cash.  Contact me for further details.

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