Due to the Jobs & Growth Tax Relief Reconciliation Act of 2003, as well as previous tax acts that continue to "phase in," filing your tax return could be more complicated than ever. Here are a few changes to watch for when preparing your 2003 tax return.

Increased child tax credit
Remember that $400 check many of you received late last summer? It wasn't simply a gift from Uncle Sam. Instead it was a prepayment of the increase in the child tax credit for 2003 to $1,000. And now you'll have to reconcile that prepayment with the child tax credit you can claim for 2003.

Check out Form 1040, line 49. There is a worksheet you'll have to complete in order to reconcile your total child tax credit and the amounts of your prepayments. Uncle Sam knows who has received these prepayments, and if you don't compute the proper reconciliation, you can expect a tap on the shoulder from the IRS.

Some of you will find that you can actually "double-dip" the child tax credit. But make sure that you report the proper amount.

Lower taxes on qualified dividends
Uncle Sam will take a smaller chunk of qualified dividends received from domestic corporations and some foreign corporations. The key word, though, is "qualified" -- not all dividends will be taxed at the new, lower rate. Read this article to learn the requirements.

Furthermore, reporting those dividends will be a bit tricky. If you're required to file Schedule D (sales of assets such as stocks and property), you'll report those qualified dividends directly on Schedule D. You'll not report them on Schedule B (interest and dividend income). But if you have no stock or property sales, you'll report your qualified dividends on a new line: 9b on Form 1040, Page 1.

But either way, you'll need to complete a tax worksheet in order to take advantage of the new, lower tax rates on these qualified dividends. Thinking about borrowing some money in order to invest in dividends that are taxed at a lower rate? Think again: It doesn't work nearly as well as some financial folks would like you to believe. And if you loan out some of your shares -- usually to other investors who are "shorting" the stock -- your dividends might not be taxable. Don't think that applies to you? Think again! Your brokerage might be loaning your shares right now.

Lower taxes on qualified capital gains
If you have qualified long-term capital gains, you're in luck. The 2003 Tax Act reduced the old 20% rate to 15% and the old 10% rate to 5%. You'll have to complete Schedule D and the associated worksheets in order to take advantage of those gains, but it's well worth it.

Lower general tax rates for 2003
The new law also enacts new tax brackets for 2003 that originally were scheduled to phase in for tax year 2006. We now have the following tax brackets for 2003: 10%, 15%, 25%, 28%, 33%, and 35%.

New 10% tax bracket increase
The new law increases the income level for the 10% bracket to $14,000 for married taxpayers. The 10% bracket level will remain at $10,000 for head of household filers, and will increase to $7,000 for other folks. In other words, more people will be able to take advantage of the 10% tax bracket, thereby lowering taxes.

Tax breaks for business
If you're a business owner, don't forget about the new rules increasing the depreciation deduction. It's now possible to expense up to $100,000 in qualified assets purchased in 2003. That includes that SUV that weighs more than 6,000 pounds that you purchased for your business use.

Self-employed health insurance deduction
This deduction has been increased to 100% for 2003. That's a big step up from prior years. So if you're self-employed and you have qualified health insurance, make sure to take advantage of this deduction on Form 1040, Page 1, Line 29.

New tax rules for military personnel
When it came to taxes, many of our brave men and women in uniform were receiving short shrift. Much of that changed when the president signed the Military Family Tax Relief Act of 2003. A number of changes were made, including combat-zone filing rules, home-sale tax exclusion changes, reservist travel expense changes, and many others. If you have friends or family in the military, make sure they are aware of these changes.

Seem like a lot of changes? We've just scratched the surface. There are plenty more where these came from. Almost all Americans are affected by these tax changes. And the good news is that virtually all of the changes result in lower taxes.

Related Links:
The New Tax Changes and You
The New, Lower Tax on Dividends
New Capital Gains Tax Rates
New Tax Breaks for Small Businesses
New Military Tax Relief

If you like the way Roy Lewis simplifies confusing tax issues, check out his just-published book, The Motley Fool's Investment Tax Guide 2002: Smart Tax Strategies for Investors. This handy 360+ page guide covers just about every tax aspect of a typical Fool's life: investing, marriage, children, education, homes, home offices, retirement accounts, medical expenses, and much more.)

January 9, 2004

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