Future Rate Cuts Accelerated Into 2003. Perhaps most importantly, the individual income tax rate cuts that were included in the 2001 tax legislation but delayed until 2004 and 2006 are accelerated into 2003 by the new law. (When it comes to rate cuts, sooner is definitely better than later.) It’s as if you woke up on January 1st with lower tax rates. (It’s not just a dream; it really happened!) Salaried employees will find their paychecks are increased when new tax withholding tables take effect this summer. Now let’s get specific. Here are the rate reductions:

The existing 10% and 15% rates remain unchanged. Furthermore, under a sunset rule, your rates will return to the pre-2001 Tax Act rates of 15%, 28%, 31%, 36% and 39.6% after 2010 unless Congress takes further action. The 10% rate would disappear entirely with 15% becoming the lowest rate.

Bigger 10% Bracket for Most Folks. In another favorable change, the new law widens the 10% rate bracket effective back to January 1st. The 10% bracket is expanded by $2,000 for married individuals who file jointly ($0 to $14,000 versus $0 to $12,000 under prior law). The bracket now is $1,000 wider for single filers and married individuals who file separately from their spouses ($0 to $7,000 versus $0 to $6,000 before). This means a bit more of your income will be taxed at the lowest 10% rate. However, this break was not extended to those who use head of household filing status (the 10% bracket continues to covers the first $10,000 of taxable income as before.)

Unless Congress takes further action, these expansions of the 10% rate bracket will expire after 2004.

Major Relief for Married Taxpayers (Finally). The unfairness of the “marriage penalty” has been a constant tax topic for many years. It just doesn’t seem quite right that getting married in and of itself can actually cause a higher federal income tax bill for the newly wedded pair. We have good news on this issue. While the 2003 Act doesn’t completely eliminate the problem, it nevertheless delivers significant relief to joint filers. It also helps married persons who file separately from their spouses. Here are the specifics:

Thanks to the new law, the 15% bracket for those who file jointly is now twice as wide as the 15% bracket for single filers. This means the 15% bracket for joint filers now extends to taxable income of $56,800 (up from the old-law figure of $47,450).

The standard deduction for joint filers has been made bigger too. It’s now $9,500, which is exactly double the amount for single filers (up from $7,950 under prior law).

The 15% bracket for married filing separate status is now the same as for single filers. So, the 15% bracket now extends to taxable income of $28,400 (versus only $23,725 under prior law).

Finally, the standard deduction for married filing separate status is now $4,750, which is the same as for single filers (under prior law it was only $3,975). Under yet another sunset rule, all these favorable changes will last only for 2003 and 2004 unless Congress takes further action.

Our New and Improved 2003 Federal Income Tax Rate Structure. This table includes all the taxpayer-friendly new rules we’ve covered so far.

Child Credit “Kicked up a Notch” to $1,000. For 2003 and 2004, the tax credit for each under-age-17 dependent child, stepchild, foster child, or grandchild is raised to $1,000 (up from only $600 for 2002). As under prior law, the credit is still subject to phase-out beginning at adjusted gross income of $110,000 for joint filers, or $75,000 for unmarried individuals.

If you are eligible for the credit, expect a tax rebate check from the government this summer (probably in July or August). Based on information in your 2002 tax return, you’ll automatically receive up to $400 for each child for whom you claims a credit last year (assuming the child is still under 17 as of the end of this year). However, if you have a qualifying child born this year, you’ll have to wait and claim the credit when you file your 2003 return next year (no automatic rebate check for you). One more thing: if you haven’t yet filed your 2002 return, please get right on it. You won’t receive the automatic rebate check until you file your 2002 return.

Now for the sunset rule: unless Congress acts, the $1,000 child tax credit will fall back to only $700 in 2005.

Alternative Minimum Tax Relief. For 2003 and 2004, the alternative minimum tax (AMT) exemption for joint filers goes up by $9,000 (to $58,000 versus only $49,000 under prior law). For singles and heads of households, the exemption rises by $4,500 (to $40,250, up from $35,750). For those who use married filing separate status, the exemption also increases by $4,500 (to $29,000 compared to the old-law figure of $24,500). These more-generous exemption amounts are supposed to prevent all of your advertised tax savings from being consumed by the AMT.

However, unless Congress takes further action, the exemptions for 2005 and later years will fall back to only $45,000, $33,750 and $22,500 respectively. Not good.