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Personal income taxes: Important changes for 2003

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in Small Business Tax,Small Business Tax Deduction Strategies

Lower rates. The 27, 30, 35 and 38.6 percent individual federal rates that applied for 2002 are reduced to 25, 28, 33 and 35 percent, respectively, for 2003. The 10 and 15 percent federal rates are unchanged.

Higher standard deduction. In an effort to reduce the marriage penalty, the 2003 standard deduction for married joint filers is dramatically increased to $9,500 (versus only $7,850 for 2002). The 10 and 15 percent tax brackets for joint filers are widened to double the brackets for single filers.

If you file using married-filing-separate status, your 2003 standard deduction is significantly increased to $4,750 (up from only $3,925 in 2002). The 10 and 15 percent tax brackets are now the same as for singles.

Lower capital gains and dividend tax rate. The maximum tax rate on long-term capital gains dropped from 20 percent to 15 percent for investments sold after May 5, 2003. (For more advice, see page 2.)

The same 15 percent maximum tax rate also applies to dividends paid by most domestic and foreign corporations after Dec. 31, 2002. Certain dividends from mutual funds, real estate investment trusts and certain foreign corporations don't qualify for the reduced rate.

Child tax credit changes. The child tax credit jumped to a maximum of $1,000 per under-age-17 dependent child (up from $600 for 2002). Claim your credit on Line 49 after reducing the amount by any advance child tax credit payment you received by check last year. (See tip 12 on page 5.)

Key point: If you received an advance child tax credit payment for a child who doesn't actually qualify for a 2003 credit, you're not required to return the money. Consider it a gift from the U.S. Treasury.

Higher child care tax credit. The maximum tax credit for child and dependent care expenses rises to $1,050 for one under-age-13 child, or $2,100 for two or more qualifying children. That's up from the 2002 maximums of $720 and $1,440, respectively. Because of the income limitations, most people are limited to a maximum 2003 credit of $600 for one qualifying child or $1,200 for two or more qualifying children. Claim your credit on Line 45 of Form 1040 and attach Form 2441 to your return.

Lifetime Learning credit doubles. The maximum Lifetime Learning tax credit for 2003 is $2,000 (20 percent 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 and attach Form 8863 to your return.

Minimal AMT relief. The alternative minimum tax (AMT) exemption amounts rise to $58,000 for joint filers, $40,250 for unmarried filers and $29,000 for married-filing-separate status. These are up from the 2002 figures of $49,000, $35,750 and $24,500, respectively. Translation: Your odds of owing the dreaded AMT for 2003 are somewhat reduced, but you still must fill out Form 6251 to know for sure.

Better chance for IRA contribution. If you're covered by a qualified retirement plan or SEP via a job or self-employment, you have a better chance of being eligible to make a deductible IRA contribution for 2003. Reason? The income-phaseout threshold is $6,000 higher this year. For example, the phaseout threshold if you are a single filer starts at adjusted gross income of $40,000 for 2003 (versus $34,000 for 2002). See the instructions for Line 24 of Form 1040 in your IRS booklet.

More paperwork needed for gifts. If you and you spouse split gifts made in 2003, each spouse must now provide more detailed information about gifts made by the other spouse on Form 709 (U.S. Gift Tax Return). In some cases, each spouse is required to file a separate Form 709 in order to make split gifts. The Form 709 filing deadline is the same date as for your 1040 (April 15, 2004, unless you get an extension).

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