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Articles
2003 Tax Law Changes and Planning Update
By: Janet L. Rosenblatt, CPA
FEDERAL TAX LAW CHANGES
Capital Gains
For sales and other dispositions of property after May 5, 2003 (including installment payments received after that date), the maximum tax rates on net long-term capital gains have changed as follows:
- The 10% tax rate (for lower income taxpayers) has changed to 5%
- The 20% tax rate has changed to 15%
- No changes to the tax rates that apply to collectibles gain, gain on qualified small business stock, and unrecaptured section 1250 gain.
The 5-year holding period has been eliminated. In 2001, taxpayers may have made an election to treat certain assets as sold in order to make any future gain eligible for the lower rate on assets held for 5 years. The election is irrevocable and 2001 tax returns cannot be amended to get a refund of the tax paid on any resulting gain.
Dividends
Beginning in 2003 qualified dividends are now taxed at the capital gains rates (5% or 15%). This applies to all qualified dividends received for the year, not just dividends received after May 5, 2003.
QUALIFIED DIVIDENDS
Generally, qualified dividend income means dividends received during the tax year from:
- domestic corporations, or
- qualified foreign corporations (that is, with certain exceptions, U.S. possessions corporations, foreign corporations whose stock is traded on established U.S. securities markets, and foreign corporations eligible for income tax treaty benefits).
HOLDING PERIODS However, in order for you to treat a dividend as qualified dividend income, you must hold the underlying stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date. (Ex-dividend date: date after which a purchaser of the stock is no longer entitled to receive a declared dividend.)
Example:
Met Life paid a dividend in 2003 as follows:
- Dividend declared 10/21/2003
- Dividend ex-date 11/5/03
- Record date: 11/7/03
- Payable date: 12/15/03
A shareholder purchased stock on 10/30/03 and continues to hold it. The shareholder received a dividend on 12/15/03. In determining whether the dividend is "qualified" you would look to see whether the stock was held for 60 days during the 120 day period as follows:
120 day period is 60 days before 11/5/03 and 60 days after 11/5/03: Dates: 9/5/03-1/5/04. The dividend would be qualified because the stock was held for 60 days during this period.
If the dividend was declared on preferred stock and is attributable to a period of more than 366 days, you must hold the underlying stock for more than 90 days during the 180-day period beginning 90 days before the ex-dividend date.
MUTUAL FUND DIVIDENDS To the extent that the dividends received by the mutual fund are qualified dividend income, you are entitled to treat the dividends you receive from the mutual fund as qualified dividend income, taxable at the 5% or 15% maximum rates. The mutual fund should notify you, by means of Form 1099-DIV, how much of your income from the mutual fund is eligible for qualified dividend income treatment.
DIVIDENDS RECEIVED BY OTHER PASS-THRU ENTITIES As in the case of mutual funds, these entities should notify you, on the appropriate form, how much of your share of their income is eligible for qualified dividend income treatment.
Child and Dependent Care Credit
The maximum amount of expenses on which the credit is calculated has increased from $2,400 for one child to $3,000, and from $4,800 for two or more children to $6,000. There have also been increases to the deemed income earned by non-working spouses (disabled or full-time student) and increases to the maximum allowed percentage credit for lower income taxpayers. Be aware of employer sponsored dependent care savings accounts. The amount deposited into these accounts will show on the taxpayer's W2 and has been excluded from the taxpayer's gross wages. Most plans allow a maximum annual contribution of $5,000, and in prior years this would have eliminated the child care credit in its entirety. Now, with the higher $6,000 expense limit for 2 or more kids, taxpayers who have a dependent care savings account and expenses in excess of $5,000 may still be eligible for a portion of the dependent care credit.
Education Credits
HOPE CREDIT The AGI limits for taking the Hope Credit have been slightly increased for those individuals filing a join return. (Phase out is now between $83,000 and $103,000 of AGI, vs. the $82,000-$102,000 of AGI in 2002.)
LIFETIME LEARNING CREDIT The amount of qualified education expenses allowed in 2003 increased from $5,000 to $10,000. This increases the maximum lifetime learning credit to $2,000.
Child Credit
The credit increased from $600 to $1000 per qualifying child. (Income limits apply). Advance child tax credits were mailed to qualifying individuals so most returns should show only the $600 credit. If the taxpayer did not receive the advance credit (2002 return not filed on time, or child born in 2003) then they should be eligible for the $1000 credit.
Retirement Savings Plans
Traditional IRA Income limits have been adjusted for those taxpayers covered by an employer-sponsored plan who wish to make deductible contributions into an IRA. The deduction phases out for joint filers with AGI between $60,000-$70,000 and single filers with AGI between $40,000-$50,000.
The maximum contribution and deduction for 2003 is $3,000 ($3,500 for taxpayers over 50)
Self-Employed Health Insurance Deduction
Premiums paid are now 100% deductible, this is an increase over the 70% allowed in 2002.
Depreciation and Section 179
SECTION 179 The maximum section 179 deduction allowed in 2003 is $100,000. In 2004 the maximum expense election will be $102,000. The maximum expense election is expected to decrease to $25,000 in 2006. The maximum expense deduction is phased out dollar for dollar for qualified property placed in service in excess of $400,000. The amount of the deduction is also limited by trade or business income.
DEPRECIATION There is a bonus depreciation allowance of 30% for property acquired after September 10, 2001 and before May 6, 2003. There is a bonus depreciation allowance of 50% for property acquired after May 5, 2003 and before January 1, 2005. When calculating the depreciation allowed for the year the 30% or 50% allowance is taken off the top, and then regular depreciation methods are applied to the remaining cost basis.
There is no AMT adjustment applicable to the entire recovery period of qualified property.
LUXURY AUTOS: The bonus depreciation for luxury autos is an additional $4,600 if placed in service prior to May 6, 2003, and an additional $7,650 for autos placed in service after May 5, 2003. Be advised that the luxury auto limits for autos differs from trucks and vans. For 2003, the normal first year luxury auto limit for a car is $3,060, for a truck or van it is $3,360.
The taxpayer may elect:
- To not claim any bonus depreciation and depreciate property using regular MACRS depreciation methods and schedules, or
- Claim 30% bonus depreciation on property otherwise qualified for 50% bonus depreciation.
The election is attached to a timely filed tax return (including extensions). If a return is filed without the election, an amended return may be filed to make the election within 6 months of the original due date of the tax return. Separate elections must be made for property qualifying for 30% bonus depreciation and 50% bonus depreciation. If the election is made, AMT adjustments will apply.
NEW YORK TAX LAW CHANGES
Aside from the increases to New York state tax rates please be aware of the following changes to New York tax laws for 2003:
ADDITION OF A LINE ON THE NEW YORK STATE IT-201 FOR "SALES AND USE TAXES" Technically, any time you buy merchandise out of state and bring it into New York, or you buy merchandise through a catalog or internet purchase for which NY sales tax was not collected you are liable for use tax. You have two choices: the exact calculation method or the AGI method. You can estimate sales & use tax due based on your AGI if you didn't purchase anything subject to use tax for over $1,000 (per item), otherwise the exact calculation method should be used.
MODIFICATION FOR DECOUPLING FROM FEDERAL BONUS DEPRECIATION For property qualified property placed in service after June 1, 2003 you must calculate depreciation using MACRS without allowing for the bonus depreciation deduction. For property placed in service prior to May 31, 2003, bonus depreciation as calculated under federal law is allowed.
SECTION 179 DEDUCTION FOR SPORT UTILITY VEHICLES You must add back the amount of the Section 179 deduction taken on a sport utility vehicle in excess of 6000 pounds. The deduction is permanently lost for New York purposes, and no adjustment is allowed to the gain or loss on the eventual disposition of the property.
Filing fees for LLC's and LLP's
Filing fees have been increased for LLCs and LLP's. Additionally Single Member LLC's are now subject to a filing fee.
Estimated tax payments required by Partnerships, LLC's and S-Corporations with non-resident partners, C-corporation partners, or non-resident shareholders
The business entity is required to remit estimated tax payments on behalf of the above type of partners or shareholders if the entity has New York source income. The amount remitted should be calculated by using the highest rate of tax. If the partner are shareholder signs an affidavit stating that he or she will comply with his or her required estimated tax obligation then the business entity does not have to remit the estimated tax payments.
S-Corporation Franchise Tax
No franchise tax is imposed on income of an S-corporation; the corporation will be liable only for the minimum tax. The amount of the minimum tax is based on gross payroll and ranges from $100 to $1,500, however if a New York S-Corporation's gross payroll, total receipts, and average asset value is under $1,000, then a $800 minimum tax will apply.
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