There's something for justabout every taxpayer in thenew $350-billion package,which was signed into law on May28, although some taxpayers will reapmore benefits than others. Among thefirst winners will be families withchildren, who will see the tax creditfor each qualifying child dependentjump from $600 to $1000.
Rebate checks for the $400 differencewill start going out in July, basedon 2002 tax returns. Creditphases out for couples whose adjustedgross income (AGI) is more than$110,000 and for single taxpayerswith an AGI of more than $75,000.
TAX BRACKETS & CHANGES
The biggest boon for taxpayers inthe upper tax brackets is the accelerationof the cut in marginal tax rates.These lower tax rates, which hadbeen scheduled to kick in next yearand in 2006, are here now, retroactiveto the first of the year.
The top marginal tax rate of38.6% is cut to 35%, and those whoare now in the 35% bracket will get arate cut to 33%.Two-point cuts are instore for the next 2 brackets: The 30%bracket gets lowered to 28%, and the27% bracket goes down to 25%.
The rates for those in the 15% and10% brackets remain the same, butthe taxable income limit to qualify forthe 10% bracket gets bumped up to$14,000 for married couples filingjointly and $7000 for single taxpayers.
For married couples who filejointly, the tax bracket limit for the15% bracket will be set at $56,800,double that of single filers, and$9350 higher than what it was underthe old rules. Because more incomewill be taxed at the 15% rate, couplesin higher brackets will also benefit.Also, the standard deduction for coupleswho file jointly will be twice thatof single taxpayers.
Two-income couples will getrelief from the so-called marriagepenalty, but couples where only 1spouse works or where 1 spouseearns much more than the other willget an even bigger benefit. The changes apply only tothis tax year and next, however,unless they are extended.
WITHHOLDINGS & THE AMT
If you're on salary, the withholdingrates based on these new taxrates are scheduled to start July 1.And since the tax rate cut is retroactiveto January 1, the additionaltake-home pay may be more thanyou expect. Self-employed doctorsmay not see any benefit until April2004, but some tax experts arecounseling those who pay estimatedtaxes to ask their tax professionalsabout cutting back on the quarterlyamount they pay the IRS.
The new law also addresses thealternative minimum tax (AMT), liftingthe exemption amount for theAMT from $49,000 to $58,000 formarried couples filing jointly andfrom $37,750 to $40,250 for singletaxpayers, but the amount will still notbe indexed for inflation. Unless Congressacts again, the number of taxpayerssubject to the AMT is expectedto rise sharply over the nextdecade. Also, the AMT changes areamong the many now-you-see-it,now-you-don't provisions of the newlaw. In addition, the AMT exemptionincreases will be effective only for thisyear and next; the exemptionamounts will then revert to the 2002levels, unless Congress extends them.
DIVIDENDS & CAPITAL GAINS
Perhaps the most hotly debatedpart of the Bush Administration's taxproposals is the elimination of taxeson stock dividends. The presidentargued that taxing dividends is doubletaxation, since the company hasalready paid taxes on the profits thatallow it to pay a dividend. Under theold rules, dividends were taxed asordinary income, up to a maximumof 38.6%, while capital gains weretaxed at a lower rate, usually 20%.
Under the new law, dividendsand capital gains will be treated thesame, taxwise. Both will be taxed at15%, except for taxpayers in the10% and 15% tax brackets, whowill pay a 5% tax on dividends andcapital gains. The tax for these low brackettaxpayers is scheduled to godown to zero in 2008.
One of the more importantaspects of the new tax law for medicalpractices is an increase in theamount spent on business equipment,such as computers, that can bedirectly expensed rather than amortizedover several years. The old lawlimited the amount you couldexpense directly to $25,000; anyamount over that had to amortized.
The new law allows $100,000worth of equipment to be written offdirectly, and that figure will beindexed for inflation in subsequentyears. The law also allows taxpayersto change from amortization todirect expensing without IRS consent.There are also beneficialchanges to amortization rules. Checkwith your tax professional to sort outthe complex details.
To get a more precise handle onwhat's in store for you under the newtax laws, visit www.turbotax.com/calculators/lawchange/notemplates/index.html.Before you start, get outyour tax return from last year; the Website will ask you to provide figures thatare as accurate as possible and toavoid estimates.