First Pioneer's Summary of Impact on Farm Taxpayers
First Pioneer has closely followed the legislative evolution of the new tax bill with the objective of being prepared to assist our clients in understanding and implementing it. This summary is based on the best information available at this time. As more becomes available, we will update and make that information available.
Your income
will be taxed at lower rates.
For regular tax purposes,
the first "slice" of your taxable income is taxed at 10%. Additional slices
of taxable income are taxed at progressively higher rates until you reach
the maximum rate. The various "slices" of taxable income, and the tax
rates each is subject to, are commonly referred to as the "tax brackets."
All of the following tax rate cuts apply retroactively to January 1, 2003:
- The tax rates above 15% for individuals, estates and trusts are reduced as follows:
- New 25% (was 27%)
- New 28% (was 30%)
- New 33% (was 35%)
- New 35%, the top rate (was 38.6%)
- If you file as a single person or are married filing separately from your spouse, the first $7,000 (instead of $6,000) of your taxable income will be taxed at 10%, the lowest tax rate. Because the extra $1,000 was taxed at 15% under prior law, you save a maximum of $50.
- If you file a joint return, the first $14,000 (instead of $12,000) of your taxable income will be taxed at 10%, the lowest tax rate. Because the extra $2,000 was taxed at 15% under prior law, you save a maximum of $100.
- If you file a joint return, more of your taxable income will be taxed at 15% (instead of winding up in the next highest tax bracket at 25%).
How
much will all of these tax rate changes save you?
The answer depends on how much taxable income you have and your
filing status. For example:
- If you are single with $60,000 of taxable income for 2003, your tax bill will be $682 less. If your taxable income is $120,000, you save $1,882.
- If you are married, file a joint return and have $60,000 of taxable income for 2003, your tax bill will be $1,286 less. If your taxable income is $120,000, you will save $2,486.
- The tax savings will be higher if your taxable income included dividends or capital gains (taxed at a lower rate under the new law, see below). Additional tax savings will be realized if the individual is entitled to an enhanced child tax credit.
Bigger
standard deduction for joint filers
If you are married, file a joint return, and don't itemize your
deductions, your basic standard deduction for 2003 is $9,500, a $1,550
increase. There's no increase in the additional standard deduction amounts
for elderly and blind persons.
Bigger
alternative minimum tax (AMT) exemptions
The new law makes the AMT less of a problem by increasing the maximum
AMT exemption amount to $58,000 for marrieds filing jointly (a $9,000
increase), to $40,250 for unmarried individuals (a $4,500 increase), and
to $29,000 for married individuals filing separate returns (a $4,500 increase).
The alternative minimum tax is payable only if it exceeds your regular
tax bill. It is a hazard because many tax breaks ("preferences") allowed
for purposes of calculating regular taxes are disallowed for AMT purposes.
The "preferences" are added back to regular taxable income, an AMT exemption
amount (which phases out at higher income levels) is subtracted, and the
balance is subject to an AMT rate of 26% or 28%. AMT is one of those tax
law complexities that we at First Pioneer always check when we prepare
returns for our clients.
Boosted
child tax credit, partially refundable for 2003
The child tax credit
for 2003 is $1,000 per qualifying child (a
$400 increase over the prior-law $600 amount). What's more, the increased
amount of the child tax credit will be paid "in advance" beginning in
mid-July over a period of three weeks. This year, a qualifying family
with one child will receive an advance payment check from the Treasury
for up to $400, and a qualifying family with two children will receive
a check for up to $800. The amount of advance payments will be based on
a person's 2002 filing status and income, as well as the number of children
claimed on the 2002 tax return who will still be under age 17 in 2003.
Note that the new law didn't change the income levels at which the child
credit starts to phase out ($75,000 for singles, $110,000 for married
couples, and $55,000 for marrieds filing separately).
Reduced
taxes on capital gains and dividends
For sales and exchanges (and installment payments received) after
May 5, 2003, gains on most capital assets held longer than one year will
be taxed a maximum rate of 15% (instead of 20%). The maximum tax rate
on capital gains drops to 5% (instead of 10%), if it would otherwise be
taxed at 10% or 15% (that is, if it were ordinary income such as salary).
In addition, dividends you receive in 2003 from a domestic corporation
(or certain "qualified foreign corporations") are taxed at the same rates
that apply to capital gains. In other words, the dividends are taxed at
rates of 15% or 5%. These new capital gain and dividend rates apply for
both the regular tax and the AMT.
Heads up
employers! Payroll tax withholding tables are about to change
Employees will get a larger paycheck as a result of the above (and other)
changes. IRS will be forwarding all employers new withholding tables by
the third week in June for use no later than July first.
Vastly
liberalized expensing election
The
following Code Section 179 expensing changes are effective for property
placed in service in tax years beginning in 2003, 2004, and 2005:
- The maximum annual expensing amount is increased to $100,000 (it's $25,000 under current law).
- The maximum annual expensing amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds a specified dollar level. This dollar level is increased to $400,000 (currently it's $200,000).
- The above increased dollar amounts are inflation-indexed for tax years beginning after 2003.
- Off-the-shelf computer software will become eligible for expensing (currently it's ineligible).
- Taxpayers may revoke expensing elections on amended returns without IRS consent. Currently, expensing is revocable only with IRS consent.
Increased
bonus first-year depreciation
In
general, under current law, a 30% additional first-year depreciation allowance
applies to the non-expensed portion of qualified property (which includes
most new MACRS property) if: (1) its original use commences with the taxpayer
after Sept. 10, 2001; (2) the asset is acquired by the taxpayer after
Sept. 10, 2001 and before Sept. 11, 2004, and (3) it is placed in service
by the taxpayer before 2005 (before 2006 for certain property with longer
production periods). Under the conference agreement:
- For 30% bonus first-year depreciation purposes, qualifying property may be acquired before 2005.
- 50% bonus first-year depreciation applies to qualified property if (1) its original use commences with the taxpayer after May 5, 2003; (2) the asset is acquired by the taxpayer after May 5, 2003 and before 2005 (there can't be a written binding contract for acquisition in effect before May 6, 2003); and (3) it is placed in service by the taxpayer before 2005 (before 2006 for certain property with longer production periods).
- Taxpayers may elect on a class-by-class basis to claim 30% instead of 50% bonus first-year depreciation for qualifying property, or elect not to claim bonus first-year depreciation at all.
Again, few farmers have the time to commit to understanding the complexity of depreciation rules. First Pioneer does that for you. As in the past, we urge you to check with us before purchasing or leasing any equipment or other production asset. We can help you factor in the best tax strategy for acquiring production assets. And when you do purchase an asset, please send your tax preparer a copy of the bill of sale…that will help us help you when we do year-end tax planning and then prepare your 2003 tax return.
There will
be more details
While this is a simpler and more straightforward tax bill than others
in the recent past, there will undoubtedly be clarifications and further
definition to some of the provisions going forward. We will continue to
monitor and gain understanding of those.
For more information contact your First Pioneer tax professional.
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