Practice Management- New Tax Law Provides Immediate, Profound Relief For Practitioners

The Jobs and Growth Reconciliation Tax Act of 2003 was signed into law by President Bush on May 28, 2003. This law provides the most significant tax savings to practitioners in recent history. It includes immediate tax cuts and opportunities for further savings over the next three to five years.
Here’s a quick snapshot of some facets of the measure.

Individual Tax Reduction

• Individual tax brackets will drop from the current rates of 27{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, 35{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, and 38.6{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, 28{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, 33{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, and 35{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}, respectively. The income range of the current 10{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} tax bracket will expand beyond the current range at various amounts, depending on the filing status. These changes are retroactive to Jan. 1, 2003 and will remain in effect through 2008.

• The maximum capital gains tax rate will decrease from 20{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 15{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. The current 10{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} rate available to individuals in the lower tax brackets will fall to 5{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. These changes are effective for sales and exchanges after May 5, 2003.

• The maximum tax rate on qualifying dividends will drop from the current 38.5{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 15{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. Individuals in the lower tax brackets will pay 5{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. These rates are retroactive to January 1, 2003.

• The child tax credit will increase from $600 to $1,000 effective 2003.

• The ‘marriage penalty’ will be relieved somewhat by increasing the standard deduction for married couples to twice the standard deduction for single taxpayers, beginning in 2003.

• For those individuals plagued by the alternative minimum tax (AMT), there is relief in the form of an increased exemption. The maximum exemption increases to $58,000 for joint filers and surviving spouses and $40,250 for unmarried filers.

The above changes affect the 2003 and 2004 reporting years. There are various reductions and revisions to the above in 2005 and the years following.
Business Tax Opportunities

Medical practices already enjoy certain tax provisions such as the handicap access credit and five-year depreciation on qualified medical equipment. The new law provides some additional expansion benefits that are scheduled to expire over the next two to three years. This will require practitioners to do some strategic planning so as not to lose out on these valuable tax benefits.

• The current Section 179 provision, which allows businesses to expense up to $25,000 of qualified equipment in the year of acquisition, increases to $100,000 per year and increases the phase-out threshold from $200,000 to $400,000 per year. This provision expires at the end of 2005. This provision now applies to off-the-shelf computer software, which was previously ineligible.

• The current bonus first-year depreciation deduction increases from 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} through 2004. This applies to qualified property acquired and placed in service after May 5, 2003 and before 2005.

• Buyers of SUVs weighing 6,000 pounds or more (Cadillac Escalade, Lincoln Navigator, Ford Expedition, Hummer, for example) could possibly write off most, if not all, of the cost of the vehicle in the first year of acquisition to the extent that it is used for business purposes.

The above changes do not encompass the entire provisions. Also, these tax breaks are not permanent and are scheduled to expire at various dates. The provisions also kick in at different periods for entities with fiscal periods other than calendar years.
For these reasons, timing and planning are very important. To maximize the tax savings opportunities, practitioners should consult with their CPA or other tax advisor.

James B. Calnan, CPA, is partner-in-charge of the Health Care Services Division of Meyers Brothers, P.C. in Longmeadow; (413) 567-6101.