JGTRRA cuts rates, increases some deductions and credits.

• Author: Hegt, Ronald B.
• Position: Jobs and Growth Tax Relief Reconciliation Act of 2003

EXECUTIVE SUMMARY

* The JGTRRA increases the temporary 10% bracket, accelerates rate decreases in the remaining tax brackets and provides some AMT and marriage penalty relief.

* Its incentive provisions lower the top tax rates on capital gains and dividends.

* Business incentives include increased first-year bonus depreciation (50%) and an increased Sec. 179 deduction.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 includes lower income tax, capital gain and dividend rates, some alternative minimum tax and marriage penalty relief and an increase in the child tax credit. For businesses, it expands the first-year bonus depreciation and expense deductions for depreciable property. This article reviews and analyzes these provisions.

To fit into the House-Senate agreed-on budget constraint of a $350 billion tax cut, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) became a jigsaw puzzle of effective dates, sliding repeals and numerous sunsets. In barely passing the Senate, the bill (without the sunsets) has been estimated to cost approximately $800 billion.

The JGTRRA cuts taxes for individuals, estates and trusts and businesses. Some of the cuts are merely an acceleration of previously enacted changes, while others are new. This article reviews an analyzes the JGTRRA provisions affecting individuals in the following areas:

* Acceleration of tax rate reductions;

* Child tax credit;

* Marriage penalty relief;

* Alternative minimum tax (AMT);

* Capital gains; and

* Dividend tax relief.

The article also discusses the enhanced first-year expense and bonus depreciation deductions for depreciable business property.

Individuals

Acceleration of Rate Reductions Section 101(a) of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created a temporary 10% tax bracket. Under the EGTRRA, the first $6,000 of a single individual's taxable income ($10,000 if head of household; $12,000 if married tiling jointly) was taxed at 10%. These amounts were scheduled to increase in 2008, with the 10% bracket expiring in 2011.

Under JGTRRA Section 104, however, the 10% bracket increases for 2003 and 2004, reverts to its current level in 2005 and increases again in 2008. As under the EGTRRA, the 10% bracket disappears in 2011. The changes in the 10% bracket are shown in Exhibit 1 below. (The income tax rates applicable to estates and nongrantor trusts did not include a 10% bracket, so there is no change to the taxation of lower-bracket fiduciaries.)

Exhibit 1: JGTRRA changes to the 10% bracket Single/ married Married filing Head of filing Year separately household jointly 2003(pre-JGTRRA) $6,000 $10,000 $12,000 New law: 2003-2004 $7,000 $10,000 $14,000 2005-2007 $6,000 $10,000 $12,000 2008-2010 $7,000 $10,000 $14,000 2011 Repealed Repealed Repealed Editor's note: Mr. Hegt is the former chair of the AICPA Tax Division's Individual Income Taxation Technical Resource Panel. This provision will save a single individual (or one married filing separately) a maximum of $50 in 2003 and 2004. It will increase his or her tax by $50 in 2005-2007; the same $50 savings returns in 2008-2010. In 2011, a single person will have a maximum tax increase of $350, as the income taxed at 10% slides into the 15% bracket. For a married couple filing jointly, the corresponding amounts are $100 and $700. Heads of household do not save under this provision. The 15% bracket change is discussed below under marriage penalty relief, as it is not an across-the-board cut.

Under the EGTRRA, the remaining tax rates were scheduled to slowly decrease through 2008, with a return to pre-EGTRRA levels in 2011. JGTRRA Section 105 accelerates these decreases, as shown in Exhibit 2 below.

Exhibit 2: JGTRRA acceleration of rate reductions 2003 (pre-JGTRRA) 27% 30% 35% 38.6% New law: 2003-2010 25% 28% 33% 35% 2011 and later 28% 31% 36% 39.6% Example 1: At $25,000 of taxable income, a married couple filing jointly will save zero from the JGTRRA rate reductions. At $100,000, the savings are $1,986. At the entry point into the top tax rate ($311,950), the savings are $6,225.

Child Credit Increase and Advance Refunds

Under the EGTRRA, a credit of $600 per child was available to eligible taxpayers. The credit was scheduled to increase to $1,000 by 2010. JGTRRA Section 101 accelerates the increase to $1,000, retroactively to Jan. 1, 2003, for 2003 and 2004 only. The credit will then drop to the EGTRRA...