The law and what it means to you

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By: JIM VANDER SPEK for the North County Times on June 8, 2003

How much will the new tax law signed by President Bush last month help you?

The most immediate benefit will go to you if you received a child tax credit last year.. With the child credit increasing to $1,000 from $600 in 2003, Congress wants to pass out the money now. Here is how this works:

If you received a $600 credit for any child born after 1986 when you filed your 2002 tax return, you will be eligible for an additional $400 advance credit this year. You will automatically receive a $400 check in the mail for each child sometime in late July or early August.

For any child born in 2003, you will need to wait until you file your return at the end of the year to receive your credit. The credit only applies to those who pay income taxes.. This is why some people consider it discriminatory against the poor.

Unless you are a very low-income taxpayer, your taxes will drop because of the new law. If your top marginal rate was 35 percent, 30 percent or 28 percent, your rates will drop a full 2 percent. Although the bottom rate of 10 percent did not go down, this bottom rate now applies to more income. Married couples will not move up to a higher bracket until their taxable income is over $14,000, and higher-income taxpayers also will have more of their income subject to this lower rate.

To help you get the benefit of these lower rates right now, the government is issuing new withholding schedules to employers to increase take-home pay this year.

If you are fortunate enough to be an investor, the taxable rate on stock dividends and capital gains drops to 15 percent. The new capital gains rate applies to sales after May 6. As you can imagine, these new rules raise the complexity factor another notch.

With tax rates dropping on long-term capital gains and stock dividend income, it may make sense to keep stocks and stock mutual funds outside of your annuities, IRAs and other tax deferred accounts while shifting non-dividend income producing investments back in.

The reason for this is that all income distributed from tax-deferred accounts is taxed at ordinary income rates. The new breaks on capital gains and dividends won't help you if such income passes through those accounts.

Another group benefiting from the new tax law is married couples who do not itemize. Up until now, these couples had a lower standard deduction than if they were unmarried. The new law increases the deduction so that it equals the sum of two single standard deductions. This partly relieves the "marriage penalty" that is still alive and well in other parts of the tax code.

Congress lost its nerve when it came to dealing with the Alternative Minimum Tax. The AMT was adjusted only slightly, making tax planning even more difficult. Much of the benefit from the new rates could be nullified if you are part of the increasing group that falls under the AMT.

Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com