1. The changes don't last forever. Like the 2001 act, most of the features of the 2003 tax act are set to expire at some point, some of them soon. For example, the much-debated additional child tax credit, which adds another $400 per eligible child to the existing $600 tax credit, lasts only two years. In 2005, it reverts to the old child-tax schedule under the 2001 act -- an act which itself is set to end in 2011.

 

Under the 2003 act, the marriage penalty relief, the alternative minimum tax relief and the bonus depreciation for business are also set to end in 2005. The capital gains and dividend rate reductions revert in 2009 to the old rates.

 

2. Not everyone with a child under age 17 will receive a child tax credit check. Beginning in late July, the Internal Revenue Service will begin mailing out child tax credit checks of up to $400 -- actually an advance on the $1,000 credit many taxpayers could claim next spring on their 2003 taxes. Beyond the issue of whether the accelerated child tax credit will go to low-income families, the credit is phased out for families earning above certain thresholds: $75,000 for single taxpayers, $110,000 for married filing jointly and $55,000 for married filing separately. 

 

Moreover, the IRS will send checks only to eligible families who claimed a child tax credit in 2002. Families with a child born in 2003, for example, will have to wait until they file their 2003 return next year.

 

3. You may need to rethink how you invest -- then again, maybe you shouldn't. It will take a while to sort out the investment implications of the tax act. For example, there's already debate about whether the reduced capital gains and dividend rates will make variable annuities (whose earnings grow tax deferred) less attractive than before. The same goes for the popular 529 savings plans, whose earnings grow tax deferred and are free of tax if spent on qualified education expenses.

 

One might save taxes by transferring ownership of appreciated assets such as stocks to children over the age of 13 who might sell the assets free of any tax in 2008. That's because in addition to reducing capital gains taxes from 20 percent to 15 percent, the 2003 tax act reduces the 10 percent capital gains tax for lower-income taxpayers to 5 percent, and eliminates it -- for one year -- in 2008.

 

On the other hand, because the investment provisions expire by 2009, some advisors are cautioning against making wholesale changes in one's portfolio.

 

4. Provisions take effect at different times. The cut in the dividend tax rate from as high as 38.6 percent to the same rate as that on capital gains is retroactive to January 1, 2003. But the cut in the capital gains tax rate applies only to assets sold on or after May 6, 2003.

 

5. The new act messes up some planning under the old act. To illustrate the risks of tax planning when tax laws change every year or two, consider the obscure strategy from the 2001 tax act known as the "deemed sale election." Under this election, some 2001 taxpayers "pretended" they sold assets they had bought before 2001 and paid the then-current capital gains tax rate on their phantom sale. This strategy allowed them to pay a lower tax rate on any future capital gains as long as they waited at least five years to actually sell the property. The new tax act has wiped out the advantage of making that tax move, which was an irrevocable election.

 

6. The alternative minimum tax will still hit many. The new tax act raises the exemption amounts of the much-hated alternative minimum tax. But experts believe that the AMT will continue to spread to more and more taxpayers, particularly for taxpayers in high-tax states. Furthermore, the exemption increase will expire in 2005.