'03 tax break adds to filers' perplexity

If you're a do-it-yourselfer who takes pride in filing your own taxes, you might find yourself grinding down pencils and erasers or putting your software through its paces this year when pulling together your return.

Even professional compilers could find themselves tripping over some recent changes to figuring out how much Uncle Sam gets.


Blame the Jobs and Growth Tax Relief Reconciliation Act of 2003, tax experts said. While the law was designed to save taxpayers $109 billion, it also created a tangled web of rules.

"Almost every time you have a tax break, which is a nice thing, you have a tax consequence," said Jackie Perlman, who keeps up with tax laws for H&R; Block.


Here's a look at some of the biggest changes that are likely to affect the most filers:

Capital gains. This could be one of the thorniest changes, because it is based on when you unloaded your investment. As ever, long-term capital gains rates apply to stocks held more than one year. But for 2003, the date you sold is important, too.

"If you have a lot of sales, you might want to talk to a tax professional this year even if you are a diehard do-it-yourselfer because it is very tricky," Perlman said. "You have two sets of rules."

There is a 20 percent tax rate that applies to sales before May 6. If you sold your stock on or after May 6, then you pay at a maximum 15 percent rate, but only if you are in a 25 percent or higher tax bracket. If you're below that, the rate is 10 percent before May 6 and 5 percent after. Where the rule becomes most problematic is trying to use losses to offset tax liability for capital gains.

Just remember that like things go with like things, Perlman said. Or in this case, timing is important.

Say you sold some stock in April and reaped a $2,000 gain, and then did so again in August for another $2,000 gain. Thanks to the new rule, the gain in April will be taxed at 20 percent, while the August amount is subject to a 15 percent rate. That is still a bit of tax to pay -- $700 worth -- so you decide to sell something at a loss to offset your liability. You dump stock in November at a $1,500 loss.

The inclination is to match the $1,500 loss to the April gain and pay taxes on only $500, but you have to match time frames. The $1,500 loss gets partnered with the August sale, and you get taxed 15 percent on the $500 difference.

Dividends. Once taxed at your individual tax rate, qualified dividends will be subject to the new lower capital gains rates. If you have $10,000 worth of dividend income in 2003 and you are in the top tax bracket, instead of getting hit with a 35 percent tax rate, you will be paying a 15 percent rate. That's a $2,000 tax reduction.


There's no tricky before-and-after-sale date with this break, but there is a nasty holding period requirement that involves quite a bit of date counting, Perlman said. Your 1099-DIV forms are supposed to tell you if your dividend qualifies for the lower rate.

Tax relief for married couples. For years, many married couples who filed a joint tax return were paying more in income tax than when filing as individuals. There are two key changes in the 2003 and 2004 tax years aimed at reducing the so-called marriage penalty.

The standard deduction for married couples filing jointly has been raised to $9,500 from $7,950.

"This only will benefit married couples that don't itemize, maybe newlyweds that don't own a home," explained Paul Manghera, senior financial counselor for Ernst & Young in Chicago. Those who do itemize on their returns are likely to see their deductions surpass the standard deduction amount.

All married couples will get some benefit from an expanded 15 percent tax bracket, which Manghera said means more of their income will be taxed at a lower rate.

Lorene Yue is a Your Money staff writer.