Tax Guru – Ker$tetter Letter

New Tax Rates

I’ve updated the 2003 tax rate schedules to reflect the new law.  I also added a lot of info at the bottom of the page on the new special rates for dividend income and long term capital gains. The lower rates on dividends kick in as of January 1, 2003; but the lower long term capital gains rates don’t apply until sales made after May 5, 2003. For installment sales, we will need to keep track of separate totals for principal received between 1/1/03 and 5/5/03 and what is received from 5/6/03 through 12/31/03 so that the proper rates can be applied.  We can expect a very messy Schedule D for 2003.

I also updated the Section 179 info to reflect this new tax law.

The New Tax Law

While looking over the details of the new tax law, and updating them on my main website, I had a few observations, especially in regard to how those of us living in the real world (as opposed to the fantasy world in which our rulers reside) will deal with it. 

Overall, it is a very good step in the right direction of lower taxes.  The most amazing change was the quadrupling of the Section 179 expensing election from $25,000 ($50,000 for owners of C corporations) to $100,000 ($200,000 for owners of C corps).  This is much more generous than the $30,000 to $75,000 figures that had been included in the early versions of the bill as it worked its way through the sausage factory, digestive system, of DC.  This should encourage a lot of capital spending on new business equipment, including evil SUVs, if they weigh more than 6,000 pounds. 

Besides raising the annual deductible amounts, this new law made some other nice changes to the Section 179 rules.  For 2004 and 2005, the annual amounts are to be adjusted for inflation.  Up until now, the Section 179 election was only allowed on originally filed tax returns.  People who overlooked it were not allowed to claim it on amended returns.  This new law allows the Section 179 expensing election to be claimed or revoked on amended returns for 2003, 2004 and 2005.

There are several aspects of the new law that leave a lot to be desired.  The short time horizon, with all of the changes disappearing after 2004 or 2005, does make long range planning a bit tenuous.  We have to hope that the GOP’s strategy of bringing this matter back up for a vote in 2004 will have the desired effect of making those opposed have to defend raising everyone’s taxes. 

The failure to eliminate the double taxation of corporate income is very disappointing. The compromise, to tax dividends at the special long term capital gains rates of 5% and 15%, is just one more example of how our rulers never miss an opportunity to make things more complicated in the tax system.  This will obviously be great for stimulating more business for us tax pros and our software suppliers.  I’ve even heard predictions of a 25% increase in H&R Block’s stock price due to this new tax law requiring more people to seek out their help in preparing tax returns.

The biggest failure of this new law is its attempt to remove the marriage penalty.  The marriage penalty is a very real aspect of our tax system.  I have seen countless couples either get divorced or refuse to get married just because the thousands of dollars in additional taxes they would be required to pay for the privilege of being married.  As I have always advised, if our rulers really wanted to eliminate this penalty, they would just allow people to compute their taxes under both methods, married and as if they were single, and pay the lower amount. 

However, our rulers always come up with some half-assed token deduction for married couples that is just a drop in the bucket toward wiping out the actual penalty.  This new law’s approach is no better.  In fact, this new law even adds new marriage penalties with the phase-out amounts for the new tax credits and deductions that are in the law to prevent the evil rich from receiving any of the tax breaks.  The phase-out amounts are much higher for two single people than for a married couple.  How our rulers can claim to be removing the marriage penalty while actually adding new penalties is a skill that only politicians seem to have.  A disconnect between their perception and the real world reality in which the rest of live. 

KMK