Money Management - July 2003

The Bush Tax Plan

How Does It Affect Nevadans ?

by Jason A. Thomas

The Bush Tax Plan (also known as the Jobs and Growth Tax Relief Reconciliation Act of 2003, or JGTRRA) has effectively created a windfall for individuals and business owners. The tax package creates incentives by accelerating the reduction of tax brackets, reducing tax on capital gains and dividends and increasing the allowable depreciation deduction on fixed assets. Also included in the package will be $400 rebate checks paid this summer to qualified individuals with children, as well as a much-needed provision to eliminate the marriage penalty.

None of the tax law changes are permanent; they expire at different dates over 10 years. It is forecasted that the JGTRRA tax plan will prove one of the largest tax cuts in history, because the tax reductions are expected to be extended when they are scheduled to expire. The tax plan focuses on the reduction of income taxes to boost the economy and does not change the existing estate tax laws. The emphasis, which will continue, is on reducing income taxes for economic stimulus, leaving estates vulnerable to estate tax increases.

A brief description of the major provisions of the new law follows.

15 Percent Top Rate on Capital Gains

Under the new law, the maximum net long-term capital gain rate is reduced to 15 percent effective for sales and payments received after May 5, 2003. The rate is reduced to 5 percent for taxpayers in lower income tax brackets.

15 Percent Top Rate on Dividends

For many individuals, the new law makes a deep cut in the tax on qualified dividends received from 2003 to 2008. Instead of being taxed at an individual’s top bracket – up to 35 percent – qualified dividends will be taxed at a maximum of 15 percent (less for taxpayers in the two lowest tax brackets).

Increased Business Expensing Allowance and Bonus Depreciation

For qualified fixed assets, including some computer software, the tax law increases the business expensing allowance from $25,000 to $100,000. This provision is effective for fixed assets purchased and placed in service from January 1, 2003 through December 31, 2005. The full $100,000 is available for each taxable year, provided the total cost of such property does not exceed $400,000 in any given year.

The other incentive created to work in conjunction with the increase in the small business expensing allowance is bonus depreciation. This incentive allows an increased bonus depreciation deduction of 50 percent of the cost of qualified depreciable assets. To qualify for the higher bonus depreciation percentage, the property generally must be acquired after May 5, 2003 and placed in service before January 1, 2005 (January 1, 2006, for qualified property with a longer production period).

Combining bonus depreciation with the increased business expensing allowance can generate significant tax savings. For example, maximum benefit can be achieved by expensing the purchase of used assets, while reserving bonus depreciation for purchases of new assets. Proper planning and pro-forma depreciation calculations will ensure that maximum depreciation deduction and tax benefits are obtained.

Individual Income Tax Cuts

Before JGTRRA’03, the marginal income tax rates were 10 percent, 15 percent, 27 percent, 35 percent and 38.6 percent. The new law changes the marginal rates for 2003 to 10 percent, 15 percent, 25 percent, 33 percent and 35 percent, retroactive to January 1, 2003. For taxpayers in the highest marginal tax bracket, the savings will be 3.6 percent of taxable income in excess of $311,950 for 2003. The acceleration of the reduction in the marginal tax brackets is effective until 2010 and reverts to pre-JGTRRA’03 levels in 2011.

Jason A. Thomas
Jason A. Thomas, CPA, is tax manager for Fair, Anderson & Langerman, a CPA and business advisory firm based in Las Vegas.