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UNDERSTANDING THE 2003 TAX ACT

On May 28, President Bush signed the 2003 Jobs and Growth Tax Relief Reconciliation Act into law.

Following are highlights of selected provisions:

CHANGES AFFECTING NONCORPORATE TAXPAYERS

REDUCED CAPITAL GAIN TAX RATES

Under the old law, the maximum tax rate on a noncorporate taxpayer's adjusted net long-term capital gain was 20 percent, or 10 percent for taxpayers in the 10 percent or 15 percent brackets. These rates applied for both regular tax and the ANT.

There also was a maximum 25 percent tax rate on unrecaptured Sec. 1250 gain, a maximum 28 percent rate on net long-term capital gain on the sale or exchange of collectibles and an effective 14 percent regular tax rate on qualified gain from small-business stock. Any amount of unrecaptured Sec. 1250 gain or 28 percent rate gain otherwise taxed at a 15 percent rate was taxed at the 15 percent rate.

Any gain from the sale or exchange of property held more than five years that would otherwise be taxed at the 10 percent rate was taxed at an 8 percent rate. Any gain from the sale or exchange of property held more than five years, whose holding period began after 2000, which would otherwise be taxed at the 20 percent rate, was taxed at an 18 percent rate.

The new law reduces these 10 percent and 20 percent capital tax rates to 5 percent and 15 percent for both the regular tax and AMT. These lower rates apply to assets held more than one year.

The 5 percent tax rate is reduced to percent for tax years beginning after 2007.

These new tax rates apply to tax years ending after May 5, 2003, but will not apply to tax years beginning after 2008.

For tax years that include May 6, 2003, the lower rates apply to amounts properly taken into account for the portion of the year on or after that date. This generally has the effect of applying the lower rates to capital assets sold or exchanged, and installment payments received, after May 5, 2003. In the case of gain and loss taken into account by a pass-through entity, the date taken into account by the entity is the appropriate date for applying this rule.

REDUCED TAX RATES ON DIVIDENDS

For tax years beginning after 2002 and before 2009, qualified dividends received by, noncorporate shareholders the same rates that apply to net capital gains. Therefore, during this time period, these dividends will not be taxed as ordinary income but, instead, will be subject to tax rates of only 5 percent or 15 percent (as described above). This treatment applies for both the regular tax and the AMT.

Qualified dividends generally are dividends received from domestic corporations and qualified foreign corporations (discussed below).

If a shareholder does not hold a share of stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date, dividends received on the stock are ineligible for the reduced rates. (For stock having preference in dividends, this holding period is for more than 90 days during the 180-day period beginning 90 days before the ex-dividend date.)

These reduced tax rates also are not available for dividends to the extent that the taxpayer is obligated, whether pursuant to a short sale or otherwise, to make related payments with respect to positions in substantially similar or related property.

If an individual receives an extraordinary dividend eligible for the reduced rates with...