Friday, October 03, 2003

The New Tax Law - Small in Size, Big in Implications Well, the Congress did it & sort of. The new tax law is small in pages, but very big in implications. Those of you not vacationing on the far side of Mars probably have heard that the maximum tax rate on dividends and capital gains has declined to 15 percent; lower-bracket taxpayers are facing a maximum five-percent -- and in 2008, miracle of miracles, zero percent -- tax rate on such classes of income. This change alone has substantial implications both for the investor and small-business owner that present enough opportunities and pitfalls that accountants, the well informed, will be called on for significant tax advice during the next five years. Surgent is offering a full-day course exploring the implications of the entire tax law beginning in July at many locations throughout the country. Tax rates for other taxpayers decline significantly by accelerating the "final" rates under the Economic Growth and Tax Relief Reconciliation Act of 2001. The brackets now are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent. Thus, taxpayers who were scheduled to be in the highest tax bracket of 38.6 percent will find themselves in the 35-percent tax bracket instead. These provisions have retroactive effect to the beginning of the year. The Service has issued revised withholding tables that most employers will put into effect on July 1, so take-home pay will increase for many taxpayers. Whether taxpayers should accept the decreased withholding is another question. Most taxpayers also benefit from the expanded 10-percent and 15-percent tax brackets. These rates don't change, but in the case of single or married taxpayers, the end point of the 10-percent rate has been increased, shifting $1,000 ($2,000 in the case of married filing jointly) from the 15-percent rate bracket to the 10-percent bracket. In addition, those married filing jointly increase the size of the 15-percent bracket at the expense of the next higher bracket (which was scheduled to be 27 percent in 2003, but is now 25 percent). A married taxpayer was scheduled to reach the top of the 15-percent bracket at $47,450, but now this will occur at $56,800. Married taxpayers having taxable incomes of at least $56,800 save $935 ([0.25 - 0.15] x [$56,800 - $47,450]) from this acceleration of marriage relief alone. With decreased tax brackets comes lower regular tax liabilities, which in turn increases exposure to the alternative minimum tax (AMT). To counter this, the new law increases the AMT exemption from $49,000 to $58,000 for married filing jointly and surviving spouses; $35,750 to $40,250 for heads of household and unmarried taxpayers; and $24,500 to $29,000 in the case of married filing separately. This increase replaces the scheduled increases enacted under the 2001 tax law, and like that law, the increases are effective only through 2004. Expect AMT shock in 2005 when the exemptions return to $45,000, $33,750, and $22,500. The tax law provides some additional significant incentives for businesses to purchase new capital. The 30-percent bonus depreciation has been sweetened for property acquired after May 5, 2003 and placed in service generally by December 31, 2004 by increasing the bonus percentage to 50 percent. The property eligible for the bonus-depreciation election has not changed from the classes established under the 2002 tax law. In the case of new automobiles purchased and placed in service after May 5, 2003 and before January 1, 2005, the first-year limit has been increased by $7,650 (up from a $4,600 increase for new autos purchased after September 10, 2001 and placed in service before May 6, 2003). The Service, which releases a revenue procedure each year to announce the §280F limitations for automobiles placed in service during the year, has not yet issued this information for 2003. However, assuming no adjustment from the 2002 level, the first-year limit for post-May 5, 2003 purchased new automobiles is $10,710 ($7,650 "bonus" limit + $3,060 "regular" limit). Expensing of new personal property is significantly enhanced by increasing both the dollar limitation and the phase-out threshold. For property placed in service after December 31, 2002, businesses may deduct up to $100,000 of expenditures chargeable to capital account (up from $25,000, which was scheduled to take effect in 2003) on qualifying property, and for these purposes, computer software will now qualify for this treatment. By increasing the level of capital placed in service during the year at which the maximum amount of qualifying expenditures is reduced dollar for dollar to $400,000 (up from $200,000), more companies will be able to take advantage of §179 than could in prior years. Remember that neither §179 expensing nor bonus depreciation (and any regular depreciation taken on bonus-depreciation property) is treated as an adjustment or tax preference for AMT purposes. 8:53:29 AM

It's that time of the year in which numbers applicable to the following year are being announced. Social Security -- The Social Security Administration has announced that the taxable wage base for Social Security in 2003 will increase to $87,000, up from $84,900 in 2002. In consequence, the maximum yearly Social Security tax paid by employees and employers will increase by $130.20 each for a total of $5,394, according to what the SSA said in a news release. For self-employed workers, the tax will rise by $260.40 for a total of $10,788.00. Moreover, the level of earnings below which a retired individual under age 65 may receive Social Security benefits without reduction has increased to $960 per month ($11,520 annually); for those age 65, the level increases to $2,560 per month. Medicare-- For Medicare Part A, which pays for inpatient hospital, skilled nursing facility, and some home health care, the deductible paid by the beneficiary will be $840 in 2003, up from this year's $812 deductible. The monthly premium paid by beneficiaries enrolled in Medicare Part B, which covers physician services, outpatient hospital services, certain home health services, durable medical equipment, and other items, will be $58.70, an increase over the $54 premium for 2002. The Part A deductible is the beneficiary's only cost for up to 60 days of Medicare-covered inpatient hospital care. However, for extended Medicare-covered hospital stays, beneficiaries must pay an additional $210 per day for days 61 through 90 in 2003, and $420 per day for hospital stays beyond the ninetieth day in a benefit period. For 2002, per-day payment for days 61 through 90 was $203, and $406 for beyond 90 days. For beneficiaries in skilled nursing facilities, the daily co-insurance for days 21 through 100 will be $105 in 2003, compared to $101.50 in 2002. Seniors and persons under age 65 with disabilities may obtain Part A coverage even though they have fewer than 30 quarters of Medicare-covered employment, by paying a monthly premium set according to a formula in the Medicare statute at $316 for 2003, a reduction of $3 from 2002. Seniors and certain persons under age 65 with disabilities with 30 to 39 quarters of Medicare-covered employment are entitled to pay a reduced monthly premium of $174. Pension plans -- Apart from the scheduled increases in the law, the COLA adjustments applicable to pension plans and IRAs result in no change. Thus, in 2003, the defined-benefit limitation is $160,000, the defined-contribution limit remains $40,000, the compensation taken into account is $200,000, the compensation level qualifying for SEPs remains at $450, and the compensation level defining a highly compensated employee stays at $90,000. As to some of the scheduled changes, the SIMPLE limit increases to $8,000, the §401(k) elective deferral limit increases to $12,000, the catch-up applicable to all qualified plans (other than SIMPLE §401(k) plans) increases to $2,000, the catch-up for IRAs, SIMPLEs, and SIMPLE §401(k) arrangements increases to $1,000, and the IRA contribution limit (without regard to catch-up) remains at $3,000. Mileage -- The optional standard mileage rate for businesses to use in deducting automobile costs will decrease from 36.5 cents a mile to 36 cents a mile in 2003. Also for 2003, standard mileage rates will be 14 cents a mile for use of a car when giving services to a charitable organization, the same as for 2002; 12 cents a mile for use of an automobile for medical reasons, down from 13 cents; and 12 cents a mile for computing deductible moving expenses, down from 13 cents per mile. These declines reflect reduced costs of gasoline. Per diems -- The per diem rate set forth is $204 for travel to any "high-cost locality", or $125 for travel to any other locality within the continental United States. The following localities (listed by key cities) have been added to the list of high-cost localities: Santa Monica, California; Baltimore, Maryland; Staten Island, New York; King of Prussia/Ft. Washington/Bala Cynwyd, Pennsylvania; Philadelphia, Pennsylvania; and Seattle, Washington. For purposes of applying the high-low substantiation method and the §274(n) limitation on meal expenses, the federal M&IE rate shall be treated as $45 for a high-cost locality and $35 for any other locality within CONUS. For travel away from home before January 1, 2003, the term "incidental expenses" includes, but is not limited to, expenses for laundry, cleaning and pressing of clothing, and fees and tips for services, such as for porters and baggage carriers. The term "incidental expenses" does not include taxicab fares, lodging taxes, or the costs of telegrams or telephone calls. For travel away from home after December 31, 2002, the term "incidental expenses" includes fees and tips given to porters, baggage carriers, bellhops, hotel housekeepers, stewards or stewardesses and others on ships, and hotel servants in foreign countries, but does not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, or the costs of telegrams or telephone calls. In lieu of using actual expenses in computing the amount allowable as a deduction for ordinary and necessary incidental expenses paid or incurred for travel away from home, employees and self-employed individuals who do not pay or incur meal expenses for a calendar day (or partial day) of travel away from home may use an amount computed at the rate of $2 per day for each calendar day (or partial day) the employee or self-employed individual is away from home. Projections -- At this point there are only projections, but they are from sources that have proven reliable in the past with respect to other important numbers applicable in 2003: (i) Personal exemptions: The personal exemption will rise by $50 in 2003 to $3,050. The personal exemption phaseout level will rise in 2003 to $139,500 for single filers, from $137,300; $209,250 for married joint filers, up from $206,000; $104,625 for married taxpayers filing separately, up from $103,000; and $174,400 for heads of households, up from $171,650. (ii) Standard deduction: The standard deduction for single filers will rise by $50 in 2003 to $4,750; taxpayers filing jointly by $100 to $7,950; married taxpayers filing separately by $50 to $3,975; and heads of households by $100 to $7,000. (iii) Itemized deductions: The itemized deduction phaseout level will begin at $139,500 for single filers, joint filers, and heads of households, up from $137,300, and it will begin at $69,750 for married taxpayers filing separately, up from $68,650. (iv) Tax rates: Single filers: The 27-percent tax bracket will start at taxable income of $28,400, up from $27,950; the 30-percent bracket will at $68,800, up from $67,700; the 35-percent bracket at $143,500, up from $141,250; and the 38.6-percent bracket at $311,950, up from $307,050. Joint filers: The 27-percent tax bracket will begin at taxable income of $47,450, up from $46,700; the 30-percent bracket at $114,650, up from $112,850; the 35-percent bracket at $174,700, up from $171,950, and the 38.6-percent bracket at $311,950, up from $307,050. Separate filers: All brackets begin at one-half those for joint filers (i.e., $23,725, $57,325, $87,350, and $155,975). Head of household: The 27-percent bracket will start at taxable income of $37,450, up from $27,950; the 30-percent bracket will at $96,700, up from $67,700; the 35-percent bracket at $156,600, up from $141,250; and the 38.6-percent bracket at $311,950, up from $307,05 8:53:26 AM