THE STRAUSS REPORT 

Summer 2003

Another New Tax Law- with major changes ahead….

On Wednesday May 28th, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) became law. This tax cut package – the third on three years - is designated as the third largest ($350 billion) in U. S. history. It offers immediate tax relief to individuals and families, and introduces a host of new rules, accelerated benefits and retroactive, temporary and phased in/phased-out effective dates. President Bush called the measure “a bold package of tax relief…which will turn our recovery into a lasting expansion that reaches every single corner of America.”

In this issue of The Strauss Report we will review the major provisions of this Act, including tax rate reductions, capital gains changes, the change in the tax rates on dividends, marriage penalty relief and the immediate child credit rebates. We will discuss what each of these changes might mean to you and what you might consider doing right now and during the balance of 2003 given the impact of the new law. In addition, we will review other changes and issues from previous tax laws that will affect you in 2003.

YES, THE RATES ARE LOWER….AGAIN

The new law accelerates the tax rate reductions that were not scheduled to kick in until 2006 and beyond. The rates above 15% generally fall about two percentage points. The new rates –retroactive to January 1, 2003 – are 10%, 15%, 25%, 33% and 35%. In addition, the 10% bracket has expanded – from $6000-$7000 for singles and from $12,000 to $14,000 for married taxpayers. New withholding tables are being distributed to employers – so you will see more money in your paychecks beginning in July.
What this means to you:

• Since the rate reductions are retroactive, you may want to reduce your withholding by filing a new W-4 form. Otherwise, you can look forward to a larger refund than they would have received without the reduction in rates.
• You may also consider using the additional funds to invest in an IRA, an educational savings plan for your children or pay down debt and/or home mortgages.
• Taxpayers paying Estimated Taxes may want to review their tax situation and reduce payments 3 and 4 to adjust for lower tax rates and/or less income in 2003.

THE RATES ON LONG TERM CAPITAL GAINS ARE LOWER…..

The maximum net capital gains rates (which were 10% and 20%) are now 5% and 15%. These rates are effective for sales on or after May 6, 2003 and continuing through December 31. 2007. In 2008, the 5% rate for low-income taxpayers drops to zero percent…but just for one year.
The 15% rate remains the same. On January 1, 2009 the rates revert back to the old rates of 10 and 20%!

However, the amount of allowable loss deduction per year remains at $3000 as does the rates for recaptured depreciation on rental property (25%).

What this means to you:

• The May 6, 2003 effective date will add substantial tax complexity and the IRS anticipates a large number of errors on 2003 returns. The IRS reported that eight lines will have to be added to Schedule D, the Schedule D Tax Worksheet, Form 6251 (AMT) and Form 8801 (Credit for Prior Year Tax).
• Taxpayers with capital gain distributions from mutual funds will have to use Schedule D and the new complex tax computations. Mutual fund companies will have to report capital gains distributions both pre and post the May 6th effective date.
• Since the spread between long term and short term capital gains increases to 20 points, realizing long-term capital gains instead of either short term gain or ordinary income becomes even more valuable to taxpayers in the higher tax brackets.

DIVIDENDS GET A LOWER TAX RATE TOO…

Dividend income received from an individual shareholder from a domestic or qualified foreign corporation will be taxed at a maximum rate of 15% for most taxpayers. For lower income individuals will pay tax on their dividends at a new rate of 5%. The new lower rates are effective for dividends received beginning January 1, 2003. It terminates on December 31, 2008. The five-percent rate ends on December 31, 2007, falls to zero in 2008 – and old rates return in 2009! Surely not simple.

What this means to you:

• Tax savings on dividend income for higher income taxpayers is substantial – since the rate on dividend income drops from 38.6% to 15%, or from 27% to 15%. The benefit to lower income individuals is much less since their marginal tax bracket is only 10%.
• You may want to rethink your investment strategy since interest- including bonds, money market funds and CDs - will still be taxed at ordinary income rates. Stocks will gain in appeal, especially those that pay good dividends.
• Retirement deferral may also require rethinking. Tax deferred accounts such as 401K and IRAs postpone taxes until retirement – but then their proceeds are taxed as ordinary income. If tax rates rise a few years out- a good bet considering how deficits are soaring- deferring taxes now could be costly. This could also be the case for variable annuities which offer tax deferral (often with stiff fees attached) with all income being taxed at ordinary income rates when withdrawn.

THE CHILD CREDIT HAS INCREASED - AND ADVANCE PAYMENTS ARE ON THE WAY…

The new tax law immediately increases the per child credit (under age 17) from $600 to $1,000, subject to higher income phase-outs ($110,000 for Married Filing Joint). However the increase is temporary: it is effective for tax years 2003 and 2004 reverting to the phased in credit of $700 in 2005

In order to jump start the economy, the Treasury will send out advance payment checks of $400
($1000 minus the old $600 credit) per child to the 25 million taxpayers who claimed the child credit on their 2002 tax return. These checks will be mailed on July 25, August 1 and August 8 and will be scheduled according to the last two digits of the Social Security number that appears first on your 2002 tax return (00-33 on 7/25; 34-66 on 8/01 and 67-99 on 08/08). The IRS will send you a notice of your advance payment a few days before your check is mailed.

If you did not receive a child credit in 2002 but will be eligible in 2003 you will get the full $1000 credit per child when you file your 2003 tax return. If you receive an advance payment, this amount will have to be subtracted from the full $1000 you would otherwise claim. You will need to keep the advance payment notice the IRS sends you and bring it with you when we prepare your 2003 tax return – so that the correct credit amount is included. Again not simple!

What this means to you:

• An immediate advance payment for you to spend or save will be arriving shortly. The IRS will not forward these checks so be sure your address is correct- use Form 8824 to send the IRS any address changes.
• If you will be eligible for the credit in 2003 because of a new child or lower income, adjusting your withholding now by filing a new W-4 form is a good way to get money up front without waiting until tax time in 2004.

MARRIAGE PENALTY RELIEF IS ALSO HERE…

The new tax law immediately doubles the standard deduction for married couples to twice the amount of that for single taxpayers or from $7950 to $9500. However, relief is temporary – only for two years, 2003 and 2004 and then the gradual increase from prior tax law returns for 2005-2009. In addition, the deduction for married filing separately is eliminated for this two year period with taxpayers filing separately claiming the same deduction as a single person.

The 15-percent tax bracket is also expanded for joint filers to twice the width of the same bracket for single filers – for the same two year period.

OTHER CHANGES TO NOTE…

1. The Alternative Minimum Tax did not go away and with the lower rates may hit many more taxpayers. However, the exemption amounts are increased by $4500 for Single Taxpayers and $9000 for Married Couples.
2. Small Business Expensing increased to $25,000. Also off-the-shelf software can now be expensed (Section 179) instead of depreciating is over 3 years. This change is effective for 2003, 2004 and 2005!

WHEW! DID ANYTHING STAY THE SAME?

Yes….a few including:

• Classroom Expense Deduction
  
• Tuition and Fees Deduction; Hope and Lifelong Learning Credits
  
• Student loan interest deduction
  
• Taxable Social Security computation.
  
• Education Credit for IL
  
• Dependent Care Credit – to $3000 for one child’$6000 for two children
  
• Increased IRA and 401 contributions For 2003, the IRAs amounts stay the same, but the
• 401K increases to $12000 with a $2000 catch up.
  
• Minimum IRA required distributions under the new rules.
  
• New Numbers for 2003 returns:
  
• Auto Mileage - 36 cents/mile – business; 14 cents per mile - charitable
  13 cents per mile – medical
  
• SE Health 100% in 2003 – finally
  
• SSA limits $87,000 up from $84,900

This new tax law means tax savings for almost everyone, more if you are in the higher tax brackets or have large investment income and capital gains. However, with the deficit expected to rise to over $350 billion this year alone and the debt ceiling increased to $7.4 trillion, expectations of tax increases at the state level and eventually at the federal level suggest that now is the time to review your tax and investment strategies. We are here year-round to assist you with:

• Withholding review or ES tax checkup
  
• Retirement planning
  
• Investment advising and Saving for Education
  
• Reviewing your IRA and 401K
  
• Starting a small business, and
  
• Estate and trust taxes under this new law.

In addition, both the IRS and IL are reviewing 2002 returns and we have been working with you and the IRS and IL Department of Revenue to resolve questions on notices received – and often to reduce or eliminate penalties.

JUDI STRAUSS IN PRINT, ON MEDIA

Our website- www.strausstax.com - is now in its fourth year! We have added two new sections: One is on our new Associate, Lisa Strauss Niser – who joined us in January. She has an extensive background in individual taxes and financial planning and is our expert on education funding for young families. She has over eight years of tax preparation and corporate financial and investment experience with major accounting firms. In addition, there will be a new “Questions and Answers” section on such important topics as: What happens when Someone You Love Passes On; Understanding the Ins and Outs of Saving for Education; What Happens When you Retire; Starting a New Business. We update regularly – especially on IRS strategies, upcoming workshops, TAX TIPS, my background and topics for speaking engagements.

This fall we will offer a workshop on “As We Grow Older…Understanding Estate and Trust Taxes” at the Downers Grove Library on Tuesday September 16th at 7 PM. We will also post workshops as they are schedule on the new tax law so you can plan ahead. If you would like us to speak at your church or professional group meeting, a list of speaking topics is on our website as well – just call or email me at jstrauss@theramp.net to set a date.