The good news is you'll probably have a lower tax bill this year. But filing may be more complicated than ever.
UNLESS YOU'RE A real wacko, chances are you're not terribly excited about filing your 2003 tax return. After all, if given a choice between wrangling with a hungry alligator or IRS tax forms, most folks would pick the former.
But this just might be a year when taxpayers should get a little bit pumped at the thought of tax filings. That's because, thanks to the 2003 tax cut, most folks will have the pleasant discovery that they either owe less than they did last year or that they'll be receiving a bigger refund. That's the good news. The bad news is that filing your taxes is going to be more complicated than ever. Here's some advice on how to make it through tax season unscathed.
First, let me remind you that most of the individual rates were cut substantially last year. The old 27%, 30%, 35% and 38.6% rates dropped to 25%, 28%, 33% and 35%, respectively. Only the 10% and 15% rates were left unchanged.
Also, the standard deduction for folks who are married and file joint returns has been increased. So even if you've had to itemize in the past, you may be able to claim the simple and easy standard deduction for 2003. For 2003 returns, the joint-filer standard deduction was dramatically increased to $9,500 (up from only $7,850 for 2002). Plus, the 10% and 15% brackets for joint filers were widened to double the brackets for singles.
And if you file your returns using the married-filing-separate status, you also have some hearty tax relief coming your way. Your standard deduction for 2003 is $4,750 (up from only $3,925 for 2002). Plus, the 10% and 15% rate brackets are now the same as for singles. These are the first breaks folks in this long-oppressed tax-filing category have caught in many years.
Welcome to the Schedule D Fun House
So much for the easy part. Unfortunately, if you've got long-term investment gains or losses to report this year (meaning the investment was held for more than one year), filling out Schedule D is more complicated than ever before.
The 2003 version has a whopping 53 lines, and that doesn't even begin to count all the lines in the five worksheets included in the Schedule D instructions. (You don't have to actually file these worksheets with your return.) To top it all off, you must separately report all your gains and losses that occurred after May 5, 2003. (No wonder H&R Block's stock is up!) This ultracomplicated Schedule D drill is necessary because various categories of 2003 capital gains can be taxed at various rates. Believe it or not, all of the following rates can potentially apply: 5%, 8%, 10%, 15%, 20%, 25% and 28%. Needless to say, if you had lots of capital gains and losses in 2003, you might want to hire a professional tax preparer for that reason alone. Who could blame you?
|See table below: Info for Your 2004 Tax-Planning Pleasure|
Whether you hire a pro or do it yourself, please don't forget to claim any capital-loss carryovers from your pre-2003 years on the proper lines of your 2003 Schedule D. You can use these carryover losses to offset 2003 gains, which will lower your tax bill even further. Any excess losses can be used to offset up to $3,000 of your 2003 ordinary income from salary, bonus, interest, alimony, self-employment and the like. Claim the capital-loss deduction on Line 13a of Form 1040. (If you use married-filing-separate status, you can only offset up to $1,500 of your 2003 ordinary income with capital losses.) Any losses still remaining after the preceding steps get carried over to your 2004 tax year. (For more on the treatment of capital gains, click here.)
And don't forget: The tax rates on qualified dividends earned during 2003 were also cut by last year's law. They're now taxed at a maximum rate of only 15%. (Dividends that fall within the 10% or 15% brackets are taxed at only 5%.) This income also needs to be reported on dreaded Schedule D.
Deductible IRAs Now Available to More Folks
Are you covered by a qualified retirement plan (like a 401(k) or SEP) through your employer or your small business? If so, you have a much better chance of being able to make a deductible IRA contribution for the 2003 tax year than in years past. Why? Because for 2003 the income-based phase-out thresholds are $6,000 higher for both single and married taxpayers (who file joint returns). That means you may still be able to cut your 2003 tax bill substantially by making a 2003 deductible IRA contribution. (You have until April 15 of this year to make your deductible contribution.)
For the 2003 tax year, you can potentially contribute up to $3,000 to a deductible IRA, or $3,500 if you were 50 or older as of Dec. 31, 2003. If you're married, these contribution limits apply separately to both you and your spouse. Now for the fine print:
- If you were single in 2003 and participated in a retirement plan at work, your right to make a deductible contribution to a traditional IRA is phased out between MAGI of $40,000 to $50,000. (For 2002, the phase-out range was $34,000 to $44,000.)
- If you were married last year and both you and your spouse participated in retirement plans at work, your right to make deductible contributions to separate traditional IRAs is phased out between joint MAGI of $60,000 to $70,000. (For 2002, the phase-out range was $54,000 to $64,000.)
- If you were married last year, but only one spouse participated in a retirement plan, the covered spouse's right to make a deductible contribution to a traditional IRA is phased out between joint MAGI of $60,000 to $70,000 (vs. $54,000 to $64,000 for 2002). However, the uncovered spouse's deductible contribution privilege is phased out between joint MAGI of $150,000 to $160,000 (unchanged from 2002).
Keep in mind, if your MAGI is too high for a deductible IRA contribution, you may still be able to contribute to a Roth IRA. (In fact, for many folks, a Roth IRA is going to be the better option over the long haul, anyway. Click here to see which IRA is best for you.) The Roth phase-out ranges are between MAGI of $95,000 to $110,000 for unmarried taxpayers and $150,000 to $160,000 for married filers who file joint returns.
As always, for both deductible and Roth IRAs, you must have 2003 earned income from salary or self-employment at least equal to what you contribute for the 2003 tax year. Alimony payments received last year also count as earned income. If you file jointly, count both your income and your spouse's income.
Other Notable Changes for 2003
- The maximum child tax credit has increased to $1,000 per under-age-17 dependent child (up from only $600 for 2002). Claim your credit(s) on Line 49 of form 1040 after subtracting any advance payments received by check last year. If you received a check for a child who doesn't actually qualify for a 2003 credit, the feds say you can keep the money with no questions asked. Thanks!
- The maximum child-care tax credit has increased to $1,050 for one under-age-13 qualifying child or $2,100 for two or more qualifying kids (up from the 2002 maximums of only $720 and $1,440, respectively). However, unless your 2003 income was quite modest, the maximum credit is reduced to $600 for one qualifying child or $1,200 for two or more (up from the 2002 figures of only $480 and $960, respectively). Claim your credit on Line 45 of Form 1040. Attach Form 2441 to your return.
- The maximum Lifetime Learning tax credit has increased to $2,000 (based on 20% of qualifying higher education expenses of up to $10,000). The maximum credit for 2002 was only $1,000. Claim your credit on Line 47 of Form 1040. Attach Form 8863 to your return.
- The alternative-minimum-tax (AMT) exemption amounts have been increased to $58,000 for joint filers, $40,250 for head of household and single filing status and $29,000 for married filing separate status. Unfortunately, you must complete complicated Form 6251 to know for sure if you've successfully dodged the dreaded AMT for another year.
- If you're self-employed (as a sole proprietor, LLC member or partner), you can generally deduct 100% of health-insurance premiums paid in 2003 to cover you and your family (up from only 70% in 2002).
- If you bought a new or preowned "heavy" SUV, pickup or van in 2003 and used it more than 50% for business, you may be able to claim a whopping write-off under the "Section 179 deduction" privilege. Heavy means having a gross-vehicle-weight rating (GVWR) above 6,000 pounds. To see if your vehicle passes this weighty test, check the label on the inside edge of the driver's side door. (For more on this, click here.)
- For lighter vehicles first put to business use in 2003, the maximum depreciation allowances are:
Preowned auto: $3,060
Preowned light truck or van: $3,360
New auto acquired before 5/6/03: $7,660
New auto acquired after 5/5/03: $10,710
New light truck or van acquired before 5/6/03: $7,960
New light truck or van acquired after 5/5/03: $11,010
Warning: The amounts listed above assume 100% business use in 2003. You must reduce these figures proportionately (based on mileage) if you had any personal use last year. If your business use was 50% or less, additional reductions are required.
|Info for Your 2004 Tax-Planning Pleasure|
|10% tax bracket||$0-7,150||0-14,300||0-10,200|
|Beginning of 15% bracket||7,151||14,301||10,201|
|Beginning of 25% bracket||29,051||58,101||38,901|
|Beginning of 28% bracket||70,351||117,251||100,501|
|Beginning of 33% bracket||146,751||178,651||162,701|
|Beginning of 35% bracket||319,101||319,101||319,101|
|Beginning/end of personal exemption phase-out range (based on AGI)||$142,700/
|Beginning of itemized deduction phase-out range (based on AGI)||$142,700||142,700||142,700|
|Maximum salary deferral contribution to 401(k): $13,000|
|Maximum 401(k) contribution if age 50 or older: $16,000|
|Maximum deductible contribution to SEP account: $41,000|
|Maximum contribution to profit-sharing plan: $41,000|