There have been a number of changes to the tax laws during 2003 that can have an effect on you for this year and in the future. I have attempted to list most of the highlights in the following sections. You can either click on the subject below or print out the entire 6 page document.Allowable Rates and Tax Levels
Federal Estate Tax Comments
Louisiana Inheritance Taxes
Marriage Penalty Relief
Increase in Child Tax Credit
Alternative Minimum Tax Changes
Reduction in Capital Gains Rates
Small Business Stock Gain Advantage
Tax Rate Change for Dividends
Bonus Depreciation
Additional First Year or Section 179 Depreciation
Reduced Accumulated Earnings Tax Rate
Changes to Louisiana's Non-Compete Laws
The personal exemption for 2003 is $4,750 per person but it rises to $4,850 per person in 2004.
The standard deduction for a married couple is $9,500 in 2003 but it rises to $9,700 in 2004. For a single person, the standard deduction was $4,750 in 2003 but it rises to $4,850 in 2004. With two personal exemptions for a married couple, that means that the first $19,000 of income is not taxable for most couples.
What the government giveth, they also "taketh". For adjusted gross income levels above $209,250 (2003), the personal exemption phases out and for income levels above $104,625 (2003), the itemized deduction phases downward.
Corporate Tax rates remain constant at:
0-$50,000 15% for the income in those levels $50-75,000 25% of that level plus the lower taxes $75-100,000 34% of that level plus the lower taxes $100-335,000 39% of that level plus the lower taxes $335-10 Million 34% of that level plus the lower taxes
FEDERAL ESTATE TAX COMMENTS
Federal Estate Tax exemptions will be changing in future working their way to the year 2010 when the estate tax is scheduled to disappear for one year. The current status of the exemptions is as follows:Although the Federal Estate Tax is scheduled to disappear in 2010, the following year it will come back strong like a wild weed unless Congress makes other changes to it in the meantime.
For 2003............$1,000,000 per person or $2,000,000 for a couple. For 2004-2005...$1,500,000 per person or $3,000,000 for a couple For 2006-2008...$2,000,000 per person or $4,000,000 for a couple For 2009............$3,500,000 per person or $7,000,000 for a couple
The annual exclusion for gifts not to be taxable was $10,000 from 1982 to 2001 but has been $11,000 for 2002 and 2003. It will rise when the price index rises enough to make the next thousand dollar level.
After reaching the initial exemption amount above, actual tax rates take off at 37% and grow to 49% as the top rate.
LOUISIANA INHERITANCE TAX COMMENTS
Louisiana Inheritance taxes have been in the process of phasing out during the last 4 years and we are currently in the 5th and final year of the phase out period. As of July 1, 2004, there will no longer be any Louisiana Inheritance taxes.
The present structure for Louisiana Inheritance taxes is that the tax is levied based on the amount of inheritance that each person receives. The first $25,000 is exempt for descendants, the next $20,000 is taxed at 4% and the excess is taxed as 3%. During the current year of the phaseout, only 20% of the above computed amount is the actual tax based on the 5 year phase out period.
A marriage penalty has existed in the past when the tax on the combined income of a married couple exceeds that sum of the taxes that would have been imposed if each spouse had filed separate returns as single filers.
The new 2003 tax law helps address this problem by making adjustments to the standard deduction for married persons. However, a full adjustment has not been made and there will be slight differences apparent in the future. Over time, the rates should even out to eliminate the marriage penalty.
Under the former law, taxpayers who have a qualifying child are eligible for the child tax credit. A qualifying child must be the taxpayer's child, a stepchild, sibling, step-sibling or a descendent of any of these, or an eligible foster child, who is under the age of 17 at the close of the calender year, who is a U.S. citizen and for whom the taxpayer can claim a dependency deduction. The credit for 2003 and 2004 was previously scheduled to be $600 per qualifying child rising to $700 for years 2005 through 2008, to $800 in 2009 and to $1,000 in 2010.
The new 2003 tax act increases the credit to $1,000 immediately for 2003 and 2004. Thereafter, it will fall back to the above levels that are already in place for 2005 through 2010.
Based on the data presented in the 2002 returns, most taxpayers who claimed eligible children on that return should have received an advance payment of the child credit as a check. Thus, there may be no further credit to claim on the return when it is filed.
ALTERNATIVE MINIMUM TAX CHANGES
The Alternative Minimum Tax (AMT) is a tax that catches many people off guard. It is a tax that applies in those situations when there is a loophole where the taxpayer does not have to pay the full, regular tax on all of his income. For instance, when the capital gains rates apply, the taxpayer is paying a tax that is lower than his regular tax. In some situations, the AMT can kick in to raise the amount of taxes due.
The prior AMT was computed on the total income with an exemption for married couples of $49,000 and a flat tax rate of 26% on the first $175,000 of income and a rate of 28% on the excess. Thus, this tax is normally only applicable to high income taxpayers.
The new tax act raises the exemption from $49,000 to $58,000--not a major change for a high income taxpayer.
Even though the AMT is computed with the above exemption figures, the government again has a way of taking away the "goodies". For income levels above $150,000, the exemption is reduced $1 for each $4 of income above the $150,000 level. Thus, at $382,000 of income and above, there is simply no exemption available and all income is taxed at the above rates.
REDUCTION IN CAPITAL GAINS RATES
Generally, the tax on capital gains has been set at 20% of the amount of the gain. The gain is the difference between the selling price and the cost of a capital asset that has been held for at least one year. For assets held at least five years, the rate has been 18% of the gain.
The new 2003 tax act reduces that rate from 20% to 15% of the gain. However, this new rate only applies to sales that took place after May 6, 2003 and is NOT retroactive to the beginning of 2003.
The new act also eliminates the special benefits from having held property for more than five years.
CAVEAT--As with most goodies, the tax law will automatically revert back to the previous rate structure at the beginning of 2009 unless Congress makes another change to the law,
SMALL BUSINESS STOCK GAIN ADVANTAGE
Under certain conditions, noncorporate investors may exclude up to 50% of the gain they realize on the sale or exchange of small business stock. (IRS Code 1202(a)(1). Among the principal conditions that have to be satisfied are that the stock has to have been issued after August 10, 1993, and that the investor must have held the stock for more than five years (IRC Code 1202(b). "Small Business Stock" must be issued by a C corporation, at least 80% of the corporation's assets must be invested in assets used in the active conduct of a business and the corporation's aggregarte assets at the time the stock is issued must not exceed $50 million.
In the past, 42% of the above gain was subject to the Alternative Minimum Tax. The new law changes that figure to only 7% of the excluded 50% gain.
In the past, dividends have generally been taxed at a taxpayer's regular rate of tax. There was really no difference in dividend income and any other kind of income since 1986. A taxpayer's tax rate on dividends could be as high as 27% for middle income or 38.6% for higher income persons.
When we consider that the dividends paid by corporations are paid after the corporation has already paid its income tax on the same income, the payment of dividends results in double taxation.
The new tax law changes the tax rates on dividends to only 15% for all dividends received after January 1, 2003. Thus, the new rate applies for the entire year of 2003. However, as of the beginning of 2009, this benefit disappears and dividends will again be taxed at the full rate.
Since the lower tax rates for dividends is a tax advantage, the full amount of the dividends will be taken into account when computing the Alternative Minimum Tax and the net tax of 15% may actually result in a higher tax than that.
I have had several clients who own small corporations ask if they could pay dividends out of their corporations in lieu of salary to save taxes. If they are going to pay dividends out anyway and are willing to incur the double taxation dilemna, then this will work fine. However, if they are going to reduce their salary and take the same amount of cash as dividends, then they will pay higher taxes. The reason is that the salary is allowed as a tax deduction for the corporation and they lose that if they don't take the salary. The corporation may be in a 34% tax bracket and it doesn't make sense to give up that deduction in order to pay taxes at 15%.
After the September 11 tragedy, Congress allowed a special bonus depreciation on certain assets that was 30% of the cost for certain newly acquired assets. The property had to be acquired after 9-11 and before 9-11-2004. The deduction is only available on new property that is depreciable under the MACRS tax rules and has a useful life of 20 years or less or is qualified leasehold improvements. A passenger auto used 50% or less for business did not qualify. If the property is sold prior to the stated useful life, the depreciation must be recaptured. Thus, it is not advisable to claim the deduction if there is no intent to keep the property for the full term of is life.
The bonus depreciation is available AFTER taking into account the Sec 179 depreciation stated below if the property cost exceeded the limits for that type of depreciation.
Under the new law, for property acquired after May 5, 2003, the 30% bonus depreciation is increased to 50%.
ADDITIONAL FIRST YEAR OR SECTION 179 DEPRECIATION
IRC Section 179 allows a full write off in the year of acquisiton of certain assets used in a trade or business. For 2003, the amount of this additional first year depreciation was set to be $25,000 of cost. That could consist of several items or of the first $25,000 of cost for a large item. Any costs not deducted under this provision would have been available for normal depreciation or for the above described 30% bonus depreciation. For large companies or companies with large expenditures, the first year depreciation was phased out when expenditures were above $200,000.
The new tax law changed the amount that can be deducted in the first year from $25,000 to $100,000. This provision is effective for purchases made at any time during 2003.
The phase out figure has also been increased and does not become applicable until the total expenditures by the company for equipment in the current year exceed $400,000.
The 2003 act has a quirk in it not detailed in the original Section 179 in that taxpayers who purchase "large" SUVs in 2003 for business purposes can have a tax deduction for as much as $100,000 of the costs the first year the SUV is placed in service. To qualify for this tax break, the SUV must be placed in service after December 31, 2002 adn ahve a loaded gross vehicle weight rating of more than 6,000 pounds. Automobiles can also qualify providing that the curb weight excess 6,000 pounds. Otherwise, the maximum depreciation write-off for cars for the first year commencing under the revised Code Sec 168(k) is a maximum of $7,650.
These provisions are applicable only to the year 2006.
REDUCED ACCUMULATED EARNINGS TAX RATE
The accumulated earnigns tax is a penalty tax imposed on a corporation that is formed or availed of for the purpsoe of avoiding shareholder income tax by permitting its earnings and profits to accumulate (IRC Code 531). It is imposed in addition ot the regular corporate income tax. The accumulated earnings tax is imposed on accumulated taxable income at the highest rate of tax for single individuals which is 38.6%, decreasing to 35% in 2006 and thereafter. Thus, if a corporation attempts to accumulate income rather than paying it out and having the shareholder pay a double tax, then the IRS will ZAP the company with this penalty.
The new 2003 law changes the tax rate that is applied in this case to only 15 percent, which is the new rate that would apply if the corporation paid out the accumulated earnings as dividends.
The Personal Holding Company tax is also reduced to a rate of 15% for the same reasons.
CHANGES TO LOUISIANA'S NON-COMPETE LAW
In the past, an employer could prevent an employee from taking employment with another company in competition with the present employer. Then in 2001, the La Supreme Court issued the Swat 24 case that said an employee could legitimately take employment with another employer as long as he was not self employed or did not have a financial interest in the new employer.
That ruling was overturned by the Louisiana Legislature in 2003 with the revision being effective as of August 15, 2003. You can read about all aspects of Louisiana's Non-Compete laws at my web page on that subject at Louisiana's Non-Compete Laws
======================== WARNING ======================= AND DISCLAIMER This information is provided for the reader's benefit in becoming familiar with the legal matters discussed. Your particular facts may be different from the points above. You should not rely on the above data without consulting a attorney to discuss the specific facts of your case and the law of your state. ==========================================================
If you live in Louisiana and want to talk about your situation, please call me at:
Marvin E. Owen
Attorney-CPA
3036 Brakley Drive
Baton Rouge, La 70816
ph 225-292-0099
toll-free 1-888-292-0116
e-mail marvin@meocpa.com
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