Introduction

President Bush signed the Jobs and Growth Tax Relief and Reconciliation Act of 2003 (the tax bill) on May 28, 2003. The key changes of the tax bill are reductions in tax rates, capital gains tax, and tax on dividends. Many of the provisions are retroactive to the beginning of 2003. Unless otherwise noted the effective date of changes is January 1, 2003.

Many of these provisions “sunset” at dates in the future. The law limits tax reductions to only a few years, thus the estimated revenue reduction is limited. Congress is abdicating responsibility to a future legislature.

We recommend preparation of a 2003 tax projection. This is the only way you can accurately plan for 2003 taxes and determine your estimated 2003 tax liability.

Please note that California has not conformed to these tax law changes. Our observation is that with the California budget crisis, it seems unlikely the California legislature will enact the Federal tax cuts.

Individual marginal rates

The Jobs and Growth Tax Relief and Reconciliation Act of 2003 reduces tax rates as follows:

These same tax rates apply to Single, Head of Household, and Married Filing Separate taxpayers. The taxable income limitations differ by filing status and will be adjusted in 2003.

Observations:

The tax reductions in the highest income tax brackets are significant. A rate reduction of 3.6 percent for the highest bracket taxpayers is the largest one-year rate reduction since the Reagan years. President Bush is convinced that these tax reductions will stimulate spending and the economy.

With corporate rates no longer a bargain compared with individual rates, operating as a pass through entity or sole proprietor may make sense under the tax bill.

These reduced tax rates sunset after 2010 and go back to the 2002 rates.

Effective immediately, withholding tables will be revised to reflect the rate changes of the tax bill. The new tables must be used no later than July 1, 2003.

Robert Caplan is a certified public accountant with a practice in Foster City. He is a member of the JCEF Peninsula Legal & Tax Professional Subcommittee, a group of professional advisors that meets regularly to discuss tax and estate planning developments and strategies that may prove useful to the advisors' clients, as well as the general and Jewish communities. This article provides a general overview and analysis of the new act.