IntraScope Accounting Solutions, LLC

 

 

June 2003 Edition

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With the enactment of the new tax act, I am going to dedicate this entire newsletter to update you on the changes that might affect you or your business. I have summarized the rules but keep in mind there are always exceptions and special rules. Please call me for more information about any of these tax breaks.

 

MANAGEMENT

 

Individual Tax Breaks

Child Care Credit - This is the $400 credit you have heard about that should be mailed to you later this summer. The legislation increases the child tax credit from $600 to $1000. The good news is if you were eligible in 2002 for the child credit, you will receive $400 per child. However, most high income taxpayers did not qualify for the credit because their income was too high. Check line 50 on last year's tax return to determine if you will receive a check later this year.

 

Capital Gains Tax Reduction - For sales after May 5th, 2003, the capital gains tax is reduced to 15% (5% for taxpayers in the lower income tax brackets). This is a reduction of 5%.

 

Dividend Tax Reductions - The new tax act provides that dividends will be taxed at the same rate as capital gains for dividends received after December 31, 2002. Interesting to note: interest income will be taxed at your higher marginal rate making your investment into bonds, etc. less attractive.

 

Marriage Penalty Relief - Unfortunately, this will only benefit married taxpayers that do not itemize their deductions. For those of us that itemize, this provision provides no benefit.

 

Income Tax Brackets - the highest income tax bracket has been lowered from 38.5% to 35%. The other brackets have also been reduced a couple of percentage points as well as the 10% bracket has been broadened. This should help reduce everyone's tax burden.  

 

Business Tax Breaks

 

Bonus Depreciation - the amount of the first year bonus depreciation has been increased from 30% to 50% of the basis of the asset for property acquired after May 5, 2003 and placed in service before January 1, 2005. This provision gives us some interesting planning opportunities for asset purchases neat the end of 2004.

 

First Year Depreciation on Automobiles - the amount of first year depreciation on automobiles has increased from $4600 to $9200. The combination of bonus depreciation and this increase allows us to write off the cost of automobiles much faster and more likely closer to the life of the car.

 

Section 179 Expense - this is the special section that allows us to write off the entire cost of the asset in the year of purchase, up to a limit allowed by law. Last year, the maximum 179 depreciation allowed was $24,000. This year, the amount is increased to $100,000 per year. For most of us, we will have the ability to write off all of our asset purchases each year in the year of purchase.

 

Planning Opportunities

 

With all of these changes, our year end planning most likely will be affected. It will be important to run an income tax projection to make sure you are not prepaying any tax to the IRS.

 

Because the capital gains tax rate is so low, make sure you are holding your assets, especially stocks, for one year. The difference between the highest marginal rate and the capital gains rates is 20%!!!

 

Investments in tax exempt bonds will be much less attractive with the increase in after-tax yields on taxable investments increase. You should contact your investment advisor to review your portfolio.