Congress Enacts New Tax Law

What church treasurers need to know.

Church Finance Today

Congress Enacts New Tax Law

What church treasurers need to know.

President Bush signed the Jobs and Growth Act of 2003 (“JGTRRA”) on May 28, 2003. The new law extends the 10% tax rate to cover the first $7,000 of taxable income for single persons, and $14,000 for married couples. It also lowers the tax rates above 15% to 25%, 28%, 33% and 35%. This is a drop of two percentage points for each rate except the top one, which went down 3.6 points.

The new law raises the standard deduction for married couples to $9,500 and extends the 15% tax rate to $56,800 of taxable income. Each figure is double the number for single taxpayers. The changes reduce the “marriage penalty”—the difference between the tax couples pay and the amount they would have paid as two single persons.

The bottom line is that some 91 million taxpayers will receive, on average, a tax cut of $1,126. Families with children will get relief quickly due to the acceleration of the child tax credit from $600 to $1,000 per child. Beginning in mid-July, the IRS started sending checks of $400 per child to taxpayers who claimed a child tax credit on their 2002 return. Most taxpayers will see their paychecks grow as their employer reduces the amount of tax withheld to reflect reduced tax rates, and a larger standard deduction ($9,500 for married couples).

The IRS has released new withholding tables for employers to use when figuring the federal income tax to withhold from their employees’ wages. The new tables reflect changes made by JGTRRA. Churches should use these new tables as soon as they can work them into their payroll systems.

In making tax rate reductions retroactive to the beginning of 2003, Congress recognized that tax withholding has already occurred at the higher rates required under the prior law. A conference committee report, commenting on the new tax law, states that “taxpayers who have been overwithheld as a consequence of this (should) obtain a refund of this overwithholding through the normal process of filing an income tax return, and not through the payor.” Therefore, employers and others that withhold taxes should not attempt to “correct” amounts withheld at the rates required under the law before they could implement the new withholding rates.

Employees may adjust their withholding to bring the tax paid closer to the tax owed, but they may not claim more allowances than they are entitled to, based on their expected exemptions, deductions and credits. To avoid an estimated tax penalty for not paying enough during the year, they may want to see how much their withholding drops before making further adjustments.

Key point. Employees may submit a new Form W-4 to ensure that the correct amount of tax is being withheld from their pay.

A number of provisions in the Senate version of the tax bill were not adopted by the conference committee and so did not make there way into the final law. Here are some of the rejected provisions that are of most interest to church leaders. It is possible that some or all of these proposals would be adopted if the Democratic party wins control of Congress and the White House. The Senate bill would have (1) made it much more difficult for “rabbi trusts” to qualify for the tax benefits; (2) eliminated the foreign earned income exclusion (that makes the earnings of most foreign missionaries tax free); (3) included a “sense of the Senate” that the taxation of Social Security benefits should be repealed; (4) repealed the prohibition of a deduction for the travel expenses of a spouse, dependent, or other person accompanying a taxpayer on a business trip; (5) extended Archer medical savings accounts through December 31, 2004.

The IRS is encouraging employers to provide the following notice to employees so that they will be aware of how the new law affects their withholding.

Notice to Employees

Changes in Income Tax Withholding

New withholding tables may reduce the amount of income tax withheld from your wages. The new tables, prescribed by the Department of the Treasury, reflect a change resulting from the Jobs and Growth Tax Relief Reconciliation Act of 2003. The reductions in tax withholding are due to the reduction in the current 27% and higher tax brackets and widening of the 10% tax bracket. If you do not want to have your withholding reduced, you may want to file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. You may claim fewer withholding allowances on line 5 or request additional amounts to be withheld on line 6. For additional help, get IRS Publication 919, How Do I Adjust My Tax Withholding? or visit the IRS website at and use the “Withholding Calculator.”

This article first appeared in Church Treasurer Alert, August 2003.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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