Publication 17: Your Federal Income Tax; Publication 17 Introductory Material

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

All material in this publication may be reprinted freely. A citation to Your Federal Income Tax (2003) would be appropriate.

The explanations and examples in this publication reflect the interpretation by the Internal Revenue Service (IRS) of:

Tax laws enacted by Congress,

Treasury regulations, and

Court decisions.

However, the information given does not cover every situation and is not intended to replace the law or change its meaning.

This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretations by the IRS.

All taxpayers have important rights when working with the IRS. These rights are described in Your Rights as a Taxpayer in the back of this publication.

Important Changes for 2003

This section summarizes important tax changes that took effect in 2003. Most of these changes are discussed in more detail throughout this publication.

Changes are also discussed in Publication 553, Highlights of 2003 Tax Changes.

Tax rates changes. The following items highlight the changes to the tax rates. The 2003 tax tables and tax rate schedules are included near the back of this publication.

The 10% tax rate bracket for most filing statuses is expanded.
The 15% tax rate bracket for married taxpayers filing jointly and qualifying widow(er) is expanded.
The 27%, 30%, 35%, and 38.6% tax rates are reduced to 25%, 28%, 33%, and 35%, respectively.

Child tax credits increased. You may be able to take credits of up to $1,000 for each qualifying child. But you must reduce your credits by any advance child tax credit payment you received in 2003. See chapter 36.

Advance child tax credit payment. You must reduce your 2003 child tax credits by any advance child tax credit payment you received in 2003. The amount of your advance payment is shown on Notice 1319. This notice was mailed to you in 2003. If you do not have this notice, you can check the amount of your advance payment on the IRS website at www.irs.gov or call us at 1–800–829–1040. If you received an advance payment but did not have a qualifying child for 2003, you do not have to pay back the amount you received. Do not enter the amount of your advance payment on your return. If you filed a joint return for 2002, but for 2003 you are not filing a joint return (or a joint return with the same spouse), you are considered to have received one-half of the advance payment.

Married filing joint standard deduction. The standard deduction for married taxpayers filing a joint return has increased. See chapter 22.

New capital gain rates. For gains after May 5, 2003, the 10% capital gain rate is reduced to 5% and the 20% capital gain rate is reduced to 15%. In addition, the 8% capital gain rate for qualified 5-year gain does not apply to gains after that date. For more information, see Capital Gain Tax Rates in chapter 17.

Dividends taxed at capital gain rates. After December 31, 2002, qualified dividend income is taxed at the new capital gain rates. See Qualified Dividend Income in Chapter 9.

Standard mileage rates. The standard mileage rate for the cost of operating your car decreased to 36 cents a mile for all business miles driven. See chapter 28. The standard mileage rate allowed for use of your car for medical reasons decreased to 12 cents a mile. See chapter 23. The standard mileage rate allowed for use of your car for determining moving expenses decreased to 12 cents a mile. See chapter 19.

Lifetime learning credit. The amount of qualified tuition and related expenses you may take into account in figuring your lifetime learning credit increased from $5,000 to $10,000. The credit equals 20% of these qualified expenses, with the maximum credit being $2,000. See chapter 37.

Child and dependent care credit. The following changes apply to the child and dependent care credit.

The credit can be as much as 35% (previously 30%) of your qualified expenses.
The maximum adjusted gross income amount that qualifies for the highest rate increased to $15,000 (previously $10,000).
The limit on the amount of qualifying expenses increased to $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals.
The amount of income that is treated as having been earned by a spouse who is either a full-time student or not able to care for himself or herself increased to $250 a month if there is one qualifying individual and $500 a month if there are two or more qualifying individuals. See chapter 34.

Tax benefits for adoption. Subject to the income and tax liability limits, the adoption credit and the exclusion from income of benefits under an adoption assistance program for the adoption of a child with special needs is $10,160 regardless of the amount of qualified adoption expenses. See Adoption Credit in chapter 39 and Publication 968, Tax Benefits for Adoption.

Retirement savings plans. The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans. Traditional IRA income limits. If you have a traditional IRA and are covered by a retirement plan at work, the amount of income you can have and not be affected by the deduction phaseout increases. The amounts vary depending on filing status. See chapter 18. Deemed IRAs. A qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. An employee's account can be treated as a traditional IRA or a Roth IRA. Limit on elective deferrals. The maximum amount of elective deferrals under a salary reduction agreement that could be contributed to a qualified plan increased to $12,000 ($14,000 If you were age 50 or over). However, for SIMPLE plans, the amount increased to $8,000 ($9,000 if you were age 50 or over).

Self-employed health insurance deduction. You can deduct 100% of your self-employed health insurance premiums as an adjustment to income.

Health coverage tax credit. Certain older workers can claim a credit for amounts they pay for health insurance premiums. For more information, see Health Coverage Tax Credit in chapter 39.

Certain amounts increased. Some tax items that are indexed for inflation increased for 2003. Earned income credit (EIC). The maximum amount of income you can earn and still get the earned income credit increased. The amount depends on your filing status and number of children. The maximum amount of investment income you can have and still be eligible for the credit has increased to $2,600. See chapter 38. Standard deduction. The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) has increased. The amount depends on your filing status. See chapter 22. Exemption amount. You are allowed a $3,050 deduction for each exemption to which you are entitled. However, your exemption amount could be phased out if you have high income. See chapter 3. Limit on itemized deduction. Some of your itemized deductions may be limited if your adjusted gross income is more than $139,500 ($69,750 if you are married filing separately). See chapter 31. Social security and Medicare taxes. The maximum wages subject to social security tax (6.2%) increased to $87,000. All wages are subject to Medicare tax (1.45%).

Military Family Tax Relief Act of 2003. This legislation made the following changes. See Publication 553 for more information.

The 5-year period that can qualify you to exclude the gain from the sale of a your main home can be suspended by certain members of the uniformed services or Foreign Service while on official extended duty.
The tax-free treatment of the death gratuity paid to survivors of U.S. military members for deaths occurring after September 10, 2001, increased from $3,000 to $12,000.
Amounts received as a qualifying military base realignment and closure fringe benefit are now excluded from taxable income.
The rules for filing a return that apply to members of the armed forces in a combat zone are extended to include members of the armed forces in a designated contingency operation.
Qualified military benefits include benefits under dependent-care assistance programs.
The additional tax on distributions from a Coverdell education savings account or a qualified tuition plan, does not apply to a distribution made on account of attendance at a military academy.
Reserve component members can claim an above-the-line deduction for overnight travel expenses such as transportation, lodging, and meals. See chapter 28.
Income tax relief is granted to families of astronauts who die in the line of duty.

Important Changes for 2004

This section summarizes the important changes that take effect in 2004 that could affect your estimated tax payments for 2004. More information on these and other changes can be found in Publication 553.

Standard mileage rates. For tax years beginning in 2004, the standard mileage rate for the cost of operating your car increases to:

Retirement savings plans. The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans. Traditional IRA income limits. If you have a traditional IRA and are covered by a retirement plan at work, the amount of income you can have and not be affected by the deduction phaseout increases. The amounts vary depending on filing status. Limit on elective deferrals. The maximum amount of elective deferrals under a salary reduction agreement that can be contributed to a qualified plan increases to $13,000 ($16,000 if you are age 50 or over). However, for SIMPLE plans, the amount increases to $9,000 ($10,500 if you are age 50 or over).

Tuition and fees deduction. Beginning in 2004, the amount of qualified education expenses you can take into account in figuring your tuition and fees deduction varies depending on your modified adjusted gross income. The tuition and fees deduction is explained in chapter 21.

Important Reminders

Listed below are important reminders and other items that may help you file your 2003 tax return. Many of these items are explained in more detail later in this publication.

Write in your social security number. To protect your privacy, social security numbers (SSNs) are not printed on the peel-off label that comes in the mail with your tax instruction booklet. This means you must enter your SSN in the space provided on your tax form. If you filed a joint return for 2002 and are filing a joint return for 2003 with the same spouse, enter your names and SSNs in the same order as on your 2002 return. See chapter 1.

Taxpayer identification numbers. You must provide the taxpayer identification number for each person for whom you claim certain tax benefits. This applies even if the person was born in 2003. Generally, this number is the person's social security number (SSN). See chapter 1.

Reporting interest and dividends. If you have interest or dividend income of more than $1,500, you have to file Schedule 1 (Form 1040A) or Schedule B (Form 1040) with your tax return. Also, you cannot file Form 1040EZ if you have more than $1,500 of taxable interest income.

Tax relief for victims of terrorist attacks. Under the Victims of Terrorism Tax Relief Act of 2001, the federal income tax liability of those killed in the following attacks is forgiven for certain tax years.

The Act also exempts from federal income tax certain amounts received by survivors. For more information, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.

Benefits for public safety officer's survivors. A survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty will generally be excluded from the recipient's income regardless of the date of the officer's death. The provision applies to a chaplain killed in the line of duty after September 10, 2001. The chaplain must have been responding to a fire, rescue, or emergency as a member or employee of a fire or police department. See chapter 13.

Parent of a kidnapped child. The parent of a child who is presumed by law enforcement authorities to have been kidnapped by someone who is not a family member may be able to take the child into account in determining his or her eligibility for the following.

See Publication 501, Exemptions, Standard Deduction, and Filing Information and Publication 596, Earned Income Credit (EIC).

Payments received by Holocaust victims. Restitution payments received after 1999 (and certain interest earned on the payments) are not taxable and do not affect the taxability of certain benefits, such as social security benefits. For more details, see chapter 13.

Advance earned income credit. If a qualifying child lives with you and you expect to qualify for the earned income credit in 2004, you may be able to get part of the credit paid to you in advance throughout the year (by your employer) instead of waiting until you file your tax return. See chapter 38.

Sale of your home. Generally, you will only need to report the sale of your home if your gain is more than $250,000 ($500,000 if married filing a joint return). See chapter 16.

Retirement planning services. If your employer has a qualified retirement plan, qualified retirement planning services provided for you (or your spouse) by your employer are not included in your income. For more information see, Retirement Planning Services under Fringe Benefits in chapter 6.

Individual retirement arrangements (IRAs). The following paragraphs highlight important reminders that relate to IRAs. See chapter 18 for details. IRA for spouse. A married couple filing a joint return can contribute up to the maximum amount each to their IRAs, even if one spouse had little or no income. Spouse covered by plan. Even if your spouse is covered by an employer-sponsored retirement plan, you may be able to deduct contributions to your traditional IRA if you are not covered by an employer plan. Roth IRA. You may be able to establish a Roth IRA. In this type of IRA, contributions are not deductible but earnings grow tax free and qualified withdrawals are not taxable. You may also be able to convert a traditional IRA to a Roth IRA, but you must include all or part of the taxable converted amount in income.

Retirement savings contributions credit. If you contribute to an individual retirement arrangement (IRA) or to a retirement plan sponsored by your employer, you may qualify for a tax credit. See Retirement Savings Contributions Credit in chapter 39.

Foreign source income. If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all such income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W–2 or 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents and royalties). If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Child tax credit. You may be able to claim a tax credit for each of your qualifying children under age 17 at the end of the year. This credit can be as much as $1,000 for each qualifying child. See chapter 36.

Health insurance credit. If you are an eligible individual, you can claim a tax credit equal to 65% of the amount you pay for qualified health insurance coverage. See chapter 39.

Joint return responsibility. Generally, both spouses are responsible for the tax and any interest or penalties on a joint tax return. In some cases, one spouse may be relieved of that responsibility for items of the other spouse that were incorrectly reported on the joint return. For details, see Joint responsibility in chapter 2.

Include your phone number on your return. To promptly resolve any questions we have in processing your tax return, we would like to be able to call you. Please enter your daytime telephone number on your tax form next to your signature.

Third party designee. You can check the “Yes” box in the “Third Party Designee” area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. It also allows your designee to perform certain actions. See your income tax package for details.

Payment of taxes. Make your check or money order payable to “United States Treasury.” You can pay your taxes by credit card or, if you file electronically, by electronic funds withdrawal. See chapter 1.

Faster ways to file your return. The IRS offers fast, accurate ways to file your tax return information without filing a paper tax return. You can use IRS e-file (electronic filing). For details, see chapter 1.

Free electronic filing. You may be able to file your 2003 taxes online for free thanks to an electronic filing agreement. See chapter 1.

Mailing your return. If you are filing a paper return, you may be mailing your return to a different address because the IRS has changed the filing location for several areas. If you received an envelope with your tax package, please use it. Otherwise, see the last page of this publication for a list of IRS addresses.

Private delivery services. You may be able to use a designated private delivery service to mail your tax returns and payments. See chapter 1 for more information.

Refund on a late filed return. If you were due a refund but you did not file a return, you generally must file your return within 3 years from the date the return was due (including extensions) to get that refund. See chapter 1 for more information.

Privacy Act and paperwork reduction information. The IRS Restructuring and Reform Act of 1998, the Privacy Act of 1974, and the Paperwork Reduction Act of 1980 require that when we ask you for information we must first tell you what our legal right is to ask for the information, why we are asking for it, how it will be used, what could happen if we do not receive it, and whether your response is voluntary, required to obtain a benefit, or mandatory under the law. A complete statement on this subject can be found in your tax form instruction booklet.

Customer service for taxpayers expanded. The Internal Revenue Service has expanded customer service for taxpayers. Through the agency's Everyday Tax Solutions service, you can set up a personal appointment at the most convenient Taxpayer Assistance Center, on the most convenient business day. See How To Get Tax Help in the back of this publication.

Treasury Inspector General for Tax Administration. If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1–800–366–4484 (1–800–877– 8339 for TTY/TDD users). You can remain anonymous.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1–800–THE–LOST (1–800–843–5678) if you recognize a child.

Introduction

This publication covers the general rules for filing a federal income tax return. It supplements the information contained in your tax form instruction booklet. It explains the tax law to make sure you pay only the tax you owe and no more.

Publication 17Introductory Material

Important Changes for 2003

Important Changes for 2004

Important Reminders

Introduction

Publication 17
Introductory Material