Brief overview of changes in tax law

January 25, 2004 

Q. I'm expecting a tax refund, and I'm trying to get my act together so I can file my taxes as soon as possible. I know there have been many changes in the tax law and would appreciate it if you could provide a quick review. One question in particular concerns the new capital gains rate and what happens to assets I have that were eligible for the old 18 percent rate.

A. Quite a few changes were made when the Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law in May. It is worthwhile to review these changes. You might qualify for credits or deductions that were not previously available to you. Some of the most significant changes, and the answer to your capital-gains question, follow:

* The tax rate on certain capital gains was lowered. There is a new schedule D on which to file sales and other dispositions of property. Sales after May 5, 2003, will be taxed at 15 percent for those above the 15 percent tax bracket and at 5 percent for taxpayers in or under the 15 percent bracket. Sales on or before May 5, 2003, will be taxed at the old 20 percent or 10 percent capital-gains rate. There was no change to the maximum tax rates that apply to gains on collectibles, qualified small-business stock or unrecaptured section 1250 gains.

Sorry to hear you have assets that qualified for the 18 percent rate, which has been eliminated. The old 20 percent rate was scheduled to be lowered in the year 2006 to 18 percent for qualified property held for five years.

For taxpayers to qualify for this reduced rate, they had to elect to treat assets owned as of Jan. 1, 2001, as sold and repurchased on that same date. Any resulting gain was subject to tax in 2001. If you were one of the unlucky taxpayers making this election, it is irrevocable. You are not allowed to amend your 2001 income tax return to get a refund of any tax you paid on the gain.

* Dividends paid on or after Jan. 1, 2003, are subject to the same maximum tax rate that applies to capital gains: 5 percent for taxpayers in or under the 15 percent tax bracket and 15 percent for those above.

* The maximum child tax credit is increased from $600 to $1,000 for each qualifying child in 2003. If you received an advance credit, you must reduce your 2003 credit by the amount you received.

Taxpayers receiving an advance credit were sent a Notice 1319 stating the amount of the advance credit. If the notice has been misplaced, call (800) 829-1040.

* The income limits to qualify for both the Hope and lifetime learning credits were slightly increased. The maximum lifetime learning credit was increased from $1,000 to $2,000.

* Tax relief for members of the Armed Forces and their families was provided under the Military Family Tax Relief Act of 2003. Among other benefits, it will be easier to exclude a taxable gain when selling a primary residence even if the home was not lived in for the required two years during the five-year period ending on the date of the sale. If members of the uniformed services or Foreign Service sold a home after May 6, 1997, and paid tax on a gain from the sale, they might be able to claim a refund. See IRS publication 523 for more information.

* The standard deduction was increased, tax rates were lowered and the "marriage penalty" was eliminated.

* The self-employed health insurance deduction percentage increased to 100 percent.

For more details on the tax changes and to see whether you qualify for free electronic filing, visit "1040 Central" on the IRS web site,

Send questions to Holly Nicholson, CFP, JD, P.O. Box 99466, Raleigh, NC 27624, call 990-1042 or go to her Web site,

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