Public Law 108-27: A Summary of Key Tax Changes

In May 2003, the federal government enacted Public Law 108-27, formally known as the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The law’s purpose was to provide economic stimulus through substantial reductions in federal taxes for individuals and businesses. As a follow-up to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), it accelerated many tax cuts scheduled for gradual implementation under the prior law. The use of the budget reconciliation process for its passage was a defining feature that influenced the law’s structure.

Key Tax Changes for Individuals

Acceleration of Income Tax Rate Reductions

A central component of JGTRRA was the immediate implementation of individual income tax rate reductions that were previously scheduled to take effect in later years. The law accelerated the reductions for the four highest income tax brackets, making them effective retroactively to the beginning of 2003. The 28% rate was lowered to 25%, the 31% rate to 28%, the 36% rate to 33%, and the top rate of 39.6% was decreased to 35%.

Capital Gains Tax Reduction

The act altered the taxation of long-term capital gains, which are profits from selling an asset held for more than one year. For most assets, the top tax rate on these gains was reduced from 20% to 15% for higher-income taxpayers. For taxpayers in the 10% and 15% income tax brackets, the rate on long-term capital gains was reduced from 10% to 5%. The law also included a provision to further reduce this rate to zero for these lower-income taxpayers starting in 2008.

Taxation of Qualified Dividends

JGTRRA introduced new tax treatment for “qualified dividends.” Before this law, dividends were taxed at ordinary income rates. JGTRRA changed this by taxing qualified dividends at the newly lowered long-term capital gains rates of 15% or 5%, depending on the taxpayer’s income bracket.

To be considered a “qualified dividend,” the payment had to be from a U.S. or qualifying foreign corporation. The investor also had to hold the stock for more than 60 days during a specific 121-day period surrounding the ex-dividend date to prevent short-term trading strategies.

Increased Child Tax Credit

JGTRRA provided relief to families by increasing the Child Tax Credit. The law accelerated a planned increase, raising the credit from $600 to $1,000 per child for the 2003 and 2004 tax years. To deliver this benefit quickly, the Treasury Department issued advance payment checks for the $400 increase to eligible taxpayers during 2003, based on their 2002 tax returns.

Marriage Penalty Relief

The law addressed the “marriage penalty,” where a married couple filing jointly could have a higher tax liability than if they filed as single individuals. JGTRRA accelerated two provisions for the 2003 and 2004 tax years to mitigate this. First, it increased the standard deduction for married couples to be exactly double the amount for a single filer. Second, the law expanded the 15% income tax bracket for joint filers to be twice the width of the 15% bracket for single filers, allowing them to earn more before moving into a higher tax bracket.

Key Tax Changes for Businesses

Increased Section 179 Expensing

JGTRRA provided incentives for business investment by enhancing Section 179 of the Internal Revenue Code. This section allows businesses to deduct the full purchase price of qualifying property in the year it is placed in service, rather than depreciating it over time. The 2003 law increased the maximum amount a business could expense from $25,000 to $100,000 per year. The law also raised the investment phase-out threshold from $200,000 to $400,000, allowing more businesses to take the full deduction.

Introduction of 50% Bonus Depreciation

JGTRRA also expanded bonus depreciation, increasing the rate to 50% from the 30% established in 2002. This allowed a business to immediately deduct half the cost of new qualifying property, such as assets with a recovery period of 20 years or less. The property had to be acquired after May 5, 2003, and placed in service before January 1, 2005. Businesses could use both Section 179 and bonus depreciation, first applying the Section 179 deduction and then taking 50% bonus depreciation on the remaining cost.

Alternative Minimum Tax Adjustments

The Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel tax system ensuring that high-income individuals who benefit from many deductions still pay a minimum amount of tax. Taxpayers calculate their liability under both regular and AMT rules and pay the higher amount. The AMT calculation starts with regular taxable income, adds back certain disallowed deductions like those for state and local taxes, and then subtracts an AMT exemption amount. A separate tax rate is then applied to the remaining income.

JGTRRA’s Temporary Relief

The regular tax cuts in JGTRRA would have subjected more middle-income taxpayers to the AMT, a system intended for high-income households. To prevent this, the law provided temporary relief by increasing the AMT exemption amount for the 2003 and 2004 tax years. The exemption rose to $58,000 for married couples filing jointly and to $40,250 for single filers. This increase shielded more taxpayers from being subject to the alternative tax.

Sunset Provisions and Legislative Evolution

A defining characteristic of JGTRRA was that its provisions were temporary. Due to the budget reconciliation process used for its passage, nearly all the tax cuts were written with expiration dates, or “sunsets.” For instance, the lower rates on capital gains and dividends were scheduled to expire at the end of 2008. Subsequent legislation, like the American Taxpayer Relief Act of 2012, made many of the JGTRRA-era tax rates permanent for most taxpayers.

The tax code was more significantly reshaped by the Tax Cuts and Jobs Act of 2017 (TCJA), which established the current tax brackets and rates. The TCJA also set the tax rates for long-term capital gains and qualified dividends at 0%, 15%, and 20% based on income. For families, the Child Tax Credit was increased to $2,000, with up to $1,700 being refundable for eligible taxpayers in 2025.

Business incentives were also modified by the TCJA. For 2025, the Section 179 expensing limit is $1,250,000, and bonus depreciation is set at a 40% rate. The law also greatly increased the Alternative Minimum Tax exemption amounts to ensure the tax primarily affects high-income households. Most individual tax changes from the TCJA are scheduled to expire at the end of 2025, setting the stage for further legislative debate.