Wouldn’t you think that Congress had fiddled enough with the tax laws? Not hardly, it seems. Each year they find some new tax lever to pull that will “improve the economy” and 2003 was no exception.
No matter whether you think the changes to the tax law are right or wrong, you can’t afford to ignore them. Here are some of the recent law changes that may affect you.
Reduction in Tax Rates
Tax rates were reduced in 2003. If you are “lucky” enough to be in the top tax bracket, your top tax rate was reduced 3.6%, from 38.6% to 35%. The rest of us saw a 2% reduction in tax rates.
Married couples will find their taxes reduced a bit more, since the lower 10% tax bracket has been expanded to apply to the first $14,000 of taxable income on a joint return (formerly $12,000). The amount of taxable income subject to the 15% tax rate has been expanded as well.
The tax rate on capital gains and dividends was reduced to 15% in 2003. That rate applies to capital gains on sales after May 5, 2003, and to dividends received after 2002.
Increase in Deductions
For married couples, the basic standard deduction has been increased to $9,500.
Even if you don’t itemize you can deduct $3,000 in college tuition and fees for 2003, increasing to $4,000 in 2004 and 2005, as long as your income is under $65,000 ($130,000 on a joint return).
Increase in Credits
If you have children, you probably received a special advance payment rebate last summer, reflecting an increase in the child tax credit from $600 to $1,000. If you didn’t get the advance payment rebate, don’t worry. You can claim it on your 2003 tax return.
The dependent care credit has been increased. The expenses qualifying for the credit increased from $2,400 to $3,000 for one dependent, and from $4,800 to $6,000 for two or more dependents. The maximum credit percentage also increased, from 30% to 35%.
The lifetime learning credit has increased to 20% of the first $10,000 of qualified tuition and fees, up from $5,000 in 2002.
Teachers can deduct up to $250 out-of-pocket costs for books and supplies. But 2003 is the last year that credit is in effect, barring an extension of that credit by Congress.
The IRA contribution limit remains at $3,000 for 2003 and 2004. It will increase to $4,000 for 2005 – 2007 and to $5,000 for 2008. If you are at least 50, you can contribute an additional $500 through 2005, increasing to $1,000 after that.
Your 401(k) and 403(b) contributions are limited to $13,000 in 2004, increasing to $14,000 in 2005 and $15,000 in 2006. Those 50 and older may contribute an additional $3,000 in 2004, $4,000 in 2005 and $5,000 in 2006.
If you contribute to a SIMPLE plan, the limit is $9,000 for 2004 and $10,000 for 2005. If you are at least 50, you can contribute an additional $1,500 in 2004, $2,000 in 2005 and $2,500 in 2006.
Beginning in 2004, if your estate is less than $1,500,000, there will be no federal estate tax when you die. In 2006, that exempt amount rises to $2 million, to $3.5 million in 2009, with total repeal of the estate tax in 2010. Unfortunately, Congress has made no provisions beyond 2010, so as things stand, the repeal is repealed in 2011, and estates over $1,000,000 will be taxable beginning in that year.
In 2004, the top estate tax rate will be 48%, and will drop 1% a year until it reaches 45% in 2007.
You’ll find many other helpful tax tips in the booklet
150 Ways to Save Taxes Through Life’s Transitions.