Take advantage of tax cuts

As you know, Congress just passed sweeping new tax cuts making this the third year in a row that Congress has approved major tax relief legislation at the urging of President Bush.

Although the president did not receive everything he asked for, Congress passed a relief package structured to save taxpayers money immediately.

Thanks to retroactive provisions for the rest of this year and over the next several years, taxpayers may recognize benefits quite soon.

Because of this particular new law, with its temporary effective dates and its new capital gains and dividends tax rate structure, tax planning will be essential for taxpayers to maximize many of these benefits.

The "Jobs and Growth Tax Relief Reconciliation Act of 2003" was passed by Congress just before Memorial Day and provides immediate tax relief for both individuals and small businesses.

Since the majority of tax breaks are retroactive to Jan.

1, 2003, and it lowers marginal tax rates across the board, it will mean extra disposable income for all taxpayers in 2003.

It also provides significant tax incentives designed to help businesses grow and thrive.

The passage of this new law is not just time for celebration, but a great time to plan your strategy.

Keep in mind that many of these benefits are retroactively effective and all are temporary in nature.

This makes it important for taxpayers to immediately start planning to make the most of the new tax benefits.

Now is the time to enhance your tax savings on a personal level in addition to revising your business plans to maximize aftertax business profits.

Some of the major highlights in what is being called the third largest tax cut in U.S.

history are:

* Lower individual marginal tax rates;

* Lower taxes paid on both capital gains and stock dividends;

* Increase in the child tax credit, with a rebate check in the amount of the increase ($400 per child) being sent to most taxpayers with children this summer;

* Marriage penalty relief;

* Expansion of the 10 percent bracket;

* Alternative minimum tax relief;

* Quadrupling the amount small businesses can elect to expense for the purchase of "qualified property"

* Increase in the first year "bonus" depreciation businesses can take for assets acquired after May 5, 2002; and

* Postponement of the due date for payment of third quarter 2003 estimated corporate taxes from Sept.

15, 2003 to Oct.

1, 2003.

Specifics Lower marginal tax rates.

Before the tax act, the marginal income tax rates were 10, 15, 27, 35, and 38.6 percent.

These were the tax rates for 2003 that were put into effect when Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001.

The new law changes the marginal rates for 2003, retroactive to Jan.

1, 2003, to 10, 15, 25, 33, and 35 percent.

Capital gains rates.

Inclusion of capital gains relief in this legislation came as a surprise and was part of a compromise for lowering taxes on dividends.

The tax rate on capital gains drops from 20 to 15 percent for all taxpayers except those in the lowest brackets.

Taxpayers in the 10 to 15 percent brackets will pay 5 percent on any capital gains recognized (down from 10 percent).

The 15 percent rate applies to transactions occurring for gains able to be recognized on or after May 6, 2003, and remains in effect only through Dec.

31, 2008.

In 2008, taxpayers in the 10 and 15 percent brackets will be taxed on their capital gains at zero percent.

In 2009, the capital gains rates are scheduled to return to 20 and 10 percent levels.

The reduced rates and the temporary nature of the reductions call for immediate revision in many taxpayers' investment strategies.

Stock dividends.

Stock dividends, which had been taxed at the same rate as ordinary income, will be taxed at 15 percent for most taxpayers effective Jan.

1, 2003.

This rate remains in effect until Dec.

31, 2008.

Lower-income taxpayers will pay taxes on dividends at five percent effective Jan.

1, 2003 through Dec.

31, 2007.

In 2008, lower income taxpayers will pay a zero percent tax on dividend treatment, creating a new web of complex rules for both shareholders and corporations alike.

Some of the tax breaks most impacting business: Increased small business expensing.

The new law quadruples the amount of qualified property that a business can annually expense from $25,000 to $100,000 for 2003, 2004, and 2005.

It also changes the definition of qualifying property to include off-the-shelf computer software.

Bonus depreciation.

Last year, under the Job Creation and Worker Assistance Act of 2002, businesses were given a 30 percent depreciation bonus for assets acquired between Sept.

11, 2001 and Sept.

10, 2004.

The new tax law boosts the bonus significantly to 50 percent for assets acquired on or after May 6, 2003, and before Jan.

1, 2005.

This "bonus" is in addition to regular first-year depreciation.

If bonus depreciation will not be advantageous to your business from a tax perspective, the law allows you to "elect out." A special rule applies the bonus depreciation to the purchase of a "luxury" automobile.

Keep in mind this is just a brief glimpse of the business changes that will be taking place in the new tax law.

Additionally, there are many changes that have taken place for individual taxpayers to fold into their financial plan.

Mike Klaich is managing partner of Muckel Anderson, Certified Public Accountants, in Reno.