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Your Federal Income Tax

This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Alternative Minimum Tax

This section briefly discusses an additional tax you may have to pay.

The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax. This additional tax is called the alternative minimum tax (AMT).

You may have to pay the alternative minimum tax if your taxable income for regular tax purposes, combined with certain adjustments and tax preference items, is more than:

  • $49,000 if your filing status is married filing joint (or qualifying widow(er) with dependent child),
  • $35,750 if your filing status is single or head of household, or
  • $24,500 if your filing status is married filing separate.

Adjustments and tax preference items.   The more common adjustments and tax preference items include:

  • Addition of personal exemptions,
  • Addition of the standard deduction (if claimed),
  • Addition of itemized deductions claimed for state and local taxes, certain interest, most miscellaneous deductions, and part of medical expenses,
  • Subtraction of any refund of state and local taxes included in gross income,
  • Changes to accelerated depreciation of certain property,
  • Difference between gain or loss on the sale of property reported for regular tax purposes and AMT purposes,
  • Addition of certain income from incentive stock options,
  • Change in certain passive activity loss deductions,
  • Addition of certain depletion that is more than the adjusted basis of the property,
  • Addition of part of the deduction for certain intangible drilling costs, and
  • Addition of tax-exempt interest on certain private activity bonds.

More information.   For more information about the alternative minimum tax, see the instructions for Form 1040, line 43, and Form 6251, Alternative Minimum Tax - Individuals.

Tax Figured by IRS

If you file by April 15, 2003, you can have the IRS figure your tax for you on Form 1040EZ, Form 1040A, or Form 1040.

If the IRS figures your tax and you paid too much, you will receive a refund. If you did not pay enough, you will receive a bill for the balance. To avoid interest or the penalty for late payment, you must pay the bill within 30 days of the date of the bill or by the due date for your return, whichever is later.

When the IRS cannot figure your tax.   The IRS cannot figure your tax for you if any of the following apply.

  1. You want your refund directly deposited.
  2. You want any part of your refund applied to your 2003 estimated tax.
  3. Any of your income for the year was from other than wages, salaries, tips, interest, dividends, taxable social security benefits, unemployment compensation, IRA distributions, pensions, and annuities.
  4. Your taxable income is $100,000 or more.
  5. You itemize deductions.
  6. You file any of the following forms.
    1. Form 2555, Foreign Earned Income.
    2. Form 2555-EZ, Foreign Earned Income Exclusion.
    3. Form 4137, Social Security and Medicare Tax on Unreported Tip Income.
    4. Form 4970, Tax on Accumulation Distribution of Trusts.
    5. Form 4972, Tax on Lump-Sum Distributions.
    6. Form 6198, At-Risk Limitations.
    7. Form 6251, Alternative Minimum Tax - Individuals.
    8. Form 8606, Nondeductible IRAs and Coverdell ESAs.
    9. Form 8615, Tax for Children Under Age 14 Who Have Investment Income of More Than $1,500.
    10. Form 8814, Parents' Election To Report Child's Interest and Dividends.
    11. Form 8839, Qualified Adoption Expenses.
    12. Form 8853, Archer MSAs and Long-Term Care Insurance Contracts.

Filing the Return

After you complete the line entries for the tax form you are filing (discussed next), attach the peel-off label, enter your social security number(s), sign the return, and mail it. If you do not have a peel-off label, fill in your name and address. See chapter 1 for more information.

Form 1040EZ Line Entries

Read lines 1 through 8 and fill in the lines that apply to you. If you are filing a joint return, write your taxable income and your spouse's taxable income to the left of line 6.

Earned income credit.   If you can take this credit, as discussed in chapter 37, the IRS can figure it for you. Print EIC in the space to the left of line 8.

If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. For details, see the Form 1040EZ instructions.

Form 1040A Line Entries

Read lines 1 through 27 and fill in the lines that apply to you. If you are filing a joint return, write your taxable income and your spouse's taxable income in the space to the left of line 27. Complete lines 29 through 33, 37, and 39 through 42 if they apply to you. Do not fill in lines 30 and 41 if you want the IRS to figure the credits shown on those lines. Also, enter any write-in information that applies to you in the space to the left of line 43.

Credit for child and dependent care expenses.   If you can take this credit, as discussed in chapter 33, complete Schedule 2 and attach it to your return. Enter the amount of the credit on line 29 (Form 1040A). The IRS will not figure this credit.

Credit for the elderly or the disabled.   If you can take this credit, as discussed in chapter 34, attach Schedule 3 (1040A), Credit for the Elderly or the Disabled for Form 1040A Filers. Print CFE in the space to the left of line 30 (Form 1040A). The IRS will figure this credit for you. On Schedule 3, check the box in Part I for your filing status and age. Complete Part II and lines 11 and 13 of Part III if they apply.

Earned income credit.   If you can take this credit, as discussed in chapter 37, the IRS will figure it for you. Print EIC in the space to the left of line 41. If you have a qualifying child, you must fill in Schedule EIC, Earned Income Credit, and attach it to your return.

If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. For details, see the Form 1040A instructions.

Form 1040 Line Entries

   Read lines 1 through 41 and fill in the lines that apply to you.

If you are filing a joint return, write your taxable income and your spouse's taxable income in the space under the words Adjusted Gross Income on the front of your return.

Read lines 43 through 68. Fill in the lines that apply to you, but do not fill in the Total lines. Do not fill in lines 47 and 64 if you want the IRS to figure the credits shown on those lines.

Fill in any forms or schedules asked for on the lines you completed, and attach them to your return.

Credit for child and dependent care expenses.   If you can take this credit, as discussed in chapter 33, complete Form 2441 and attach it to your return. Enter the amount of the credit on line 46. The IRS will not figure this credit.

Credit for the elderly or the disabled.   If you can take this credit, as discussed in chapter 34, attach Schedule R, Credit for the Elderly or the Disabled. Print CFE on the dotted line next to line 47 of Form 1040. The IRS will figure the credit for you. On Schedule R check the box in Part I for your filing status and age. Complete Part II and lines 11 and 13 of Part III if they apply.

Earned income credit.   If you can take this credit, as discussed in chapter 37, the IRS will figure it for you. Print EIC in the space to the left of line 64 of Form 1040. If you have a qualifying child, you must fill in Schedule EIC and attach it to your return.

If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. For details, see the Form 1040 instructions.


Tax on Investment Income of Certain Minor Children

Important Reminder

Parent's election to report child's interest and dividends.   You may be able to elect to include your child's interest and dividends on your tax return. If you make this election, the child does not have to file a return. See Parent's Election To Report Child's Interest and Dividends, later.

Introduction

This chapter discusses two special rules that apply to the tax on certain investment income of a child under age 14.

  1. If the child's interest, dividends, and other investment income total more than $1,500, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. (See Tax for Children Under Age 14 Who Have Investment Income of More Than $1,500, later.)
  2. The child's parent may be able to choose to include the child's interest and dividend income (including capital gain distributions) on the parent's return rather than file a return for the child. (See Parent's Election To Report Child's Interest and Dividends, later.)

For these rules, the term child includes a legally adopted child and a stepchild. These rules apply whether or not the child is a dependent.

These rules do not apply if:

  1. The child is not required to file a tax return, or
  2. Neither of the child's parents were living at the end of the tax year.

Useful Items You may want to see:

Publication

  • 929   Tax Rules for Children and Dependents

Form (and Instructions)

  • 8615   Tax for Children Under Age 14 With Investment Income of More Than $1,500
  • 8814   Parents' Election To Report Child's Interest and Dividends

Which Parent's Return To Use

If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the investment income of a child under age 14. For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends. The tax rate and other return information from that parent's return are used to compute the child's tax as explained later under Tax for Children Under Age 14 Who Have Investment Income of More Than $1,500.

Parents are married.   If the child's parents file separate returns, use the return of the parent with the greater taxable income.

Parents not living together.   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income.

For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2.

Parents are divorced.   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent.

Custodial parent remarried.   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Do not use the return of the noncustodial parent.

If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies.

Parents never married.   If a child's parents did not marry each other, but lived together all year, use the return of the parent with the greater taxable income. If the parents did not live together all year, the rules explained earlier under Parents are divorced apply.

Widowed parent remarried.   If a widow or widower remarries, the new spouse is treated as the child's other parent. The rules explained earlier under Custodial parent remarried apply.

Parent's Election To Report Child's Interest and Dividends

You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. If you do, your child will not have to file a return.

You can make this election for 2002 only if all the following conditions are met.

  1. Your child was under age 14 at the end of 2002. A child born on January 1, 1989, is considered to be age 14 at the end of 2002.
  2. Your child is required to file a return for 2002, unless you make this election.
  3. Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).
  4. The dividend and interest income was less than $7,500.
  5. No estimated tax payment was made for 2002 and no 2001 overpayment was applied to 2002 under your child's name and social security number.
  6. No federal income tax was taken out of your child's income under the backup withholding rules.
  7. You are the parent whose return must be used when applying the special tax rules for children under age 14. (See Which Parent's Return To Use, earlier.)

These conditions are also shown in Figure 32-A.

How to make the election.   Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. (If you make this election, you cannot file Form 1040A or Form 1040EZ.) Attach a separate Form 8814 for each child for whom you make the election. You can make the election for one or more children and not for others.

Effect of Making the Election

The federal income tax on your child's income may be more if you make the Form 8814 election.

Rate may be higher.   If you use Form 8814, the child's income may be taxed at a higher rate on your return than it would be on the child's own return.

Deductions you cannot take.   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return.

Figure 32–A. Can You Include Your Child's Income On Your Tax Return?

Figure 32–A. Can You Include Your Child's Income On Your Tax Return?

  1. The higher standard deduction for a blind child.
  2. The deduction for a penalty on an early withdrawal of your child's savings.
  3. Itemized deductions (such as your child's investment expenses or charitable contributions).

Reduced deductions or credits.   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following.

  1. Deduction for contributions to a traditional individual retirement arrangement (IRA).
  2. Deduction for student loan interest.
  3. Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses.
  4. Total itemized deductions.
  5. Personal exemptions.
  6. Credit for child and dependent care expenses.
  7. Child tax credit.
  8. Education tax credits.
  9. Earned income credit.

Penalty for underpayment of estimated tax.   If you make this election for 2002 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. If you plan to make this election for 2003, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. See chapter 5 for more information.

Figuring Child's Income

Use Part I of Form 8814 to figure your child's interest and dividend income to report on your return. Only the amount over $1,500 is added to your income. This amount is shown on line 6 of Form 8814. Include this amount on line 21 of Form 1040 or Form 1040NR. Write Form 8814 in the space next to line 21. If you file more than one Form 8814, include the total amounts from line 6 of all your Forms 8814 on line 21.

Capital gain distributions.   If your child's dividend income included any capital gain distributions, see Capital gain distributions under Figuring Child's Income in Part 2 of Publication 929.

Figuring Additional Tax

Use Part II of Form 8814 to figure the tax on the $1,500 of your child's interest and dividends that you do not include in your income. This tax is added to the tax figured on your income.

This additional tax is the smaller of:

  1. 10% × (your child's gross income - $750), or
  2. $75.

Include the amount from line 9 of all your Forms 8814 in the total on line 42, Form 1040, or line 40, Form 1040NR. Check box a on Form 1040, line 42, or Form 1040NR, line 40.

Illustrated Example

David and Linda Parks are married and will file separate tax returns for 2002. Their only child, Philip, is 8. Philip received a Form 1099-INT showing $3,200 taxable interest income and a Form 1099-DIV showing $300 ordinary dividends. His parents decide to include that income on one of their returns so they will not have to file a return for Philip.

First, David and Linda each figure their taxable income (Form 1040, line 41) without regard to Philip's income. David's taxable income is $41,700 and Linda's is $59,300. Because her taxable income is greater, Linda can elect to include Philip's income on her return. See Which Parent's Return To Use, earlier.

On Form 8814 (see illustrated form), Linda enters her name and social security number, then Philip's name and social security number. She enters Philip's taxable interest income, $3,200, on line 1a. Philip had no tax-exempt interest income, so she leaves line 1b blank. Linda enters Philip's ordinary dividends, $300, on line 2. Philip did not have any capital gain distributions, so she leaves line 3 blank.

Linda adds lines 1a and 2 and enters the result, $3,500, on line 4. From that amount she subtracts the $1,500 base amount shown on line 5 and enters the result, $2,000, on line 6. This is the part of Philip's income that Linda must add to her income.

Linda includes the $2,000 in the total on line 21 of her Form 1040 and in the space next to that line prints Form 8814 - $2,000. Adding that amount to her income increases each of the amounts on lines 22, 35, 36, 39, and 41 of her Form 1040 by $2,000. Linda is not claiming any deductions or credits that are affected by the increase to her income. Therefore, her revised taxable income on line 41 is $61,300 ($59,300 + $2,000).

On Form 8814, Linda subtracts the $750 shown on line 7 from the $3,500 on line 4 and enters the result, $2,750, on line 8. Because that amount is not less than $750, she checks the No box and enters $75 on line 9. This is the tax on the first $1,500 of Philip's income, which Linda did not have to add to her income. She must add this additional tax to the tax figured on her revised taxable income.

The tax on her $61,300 revised taxable income is $13,603. She adds $75, and enters the $13,678 total on line 42 of Form 1040, and checks box a.

Linda attaches Form 8814 to her Form 1040.

Filled-in Form 8814Forms: 8814for Linda Parks

Filled-in Form 8814Forms: 8814for Linda Parks

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